The equity release market has recently seen a significant leap forward with the introduction of products that reward clients for servicing interest on their lifetime mortgages. This is the second product on the market that offers such incentives, reflecting a growing trend toward more flexible and customer-friendly lending solutions for later life borrowers.
Traditionally, lifetime mortgages allowed interest to roll up, meaning that over time, the loan balance would increase significantly due to compound interest. While this structure provides flexibility for borrowers not wishing to make repayments, it can also erode home equity at a faster rate. In contrast, the new interest-servicing products allow clients to pay a portion of their monthly interest, which helps reduce the amount owed over the lifetime of the loan and slows down the accumulation of debt.
One of the most important aspects of this product is that it rewards clients who service at least 25% of their monthly interest with a lower interest rate—typically a reduction of around 1%. This not only reduces the overall loan cost but also allows borrowers to retain more equity in their property for future use or to pass on as an inheritance.
Flexibility and Client Control
This innovation in the lifetime mortgage market offers borrowers much-needed flexibility. Many lenders offering this type of product include built-in options such as payment holidays. This means clients can temporarily pause their payments without facing penalties, providing peace of mind for those who may experience fluctuations in their financial situation or wish to take a break for other reasons.
With traditional lifetime mortgages, clients who choose not to make any payments can see their loan balance increase significantly due to compound interest. However, with the interest-servicing option, the overall financial impact can be much more manageable. By choosing to service a portion of the interest, clients can actively reduce the total debt, giving them greater control over their financial future.
The Financial Impact: An Example
To demonstrate the benefits of interest servicing, consider the following example:
| Property Value | Release Amount | Interest Rate | Monthly Payments | Amount Owed After 15 Years | Savings Over Full Interest Roll-Up |
|---|---|---|---|---|---|
| £275,000 | £60,000 | 7.99% (Full roll-up) | £0 | £198,121 | £0 |
| £275,000 | £60,000 | 6.99% (With 1% Discount) | £87.38 (Minimum payment) | £143,012 | £39,381 |
In this scenario, if the borrower chooses the full interest roll-up option, they would owe £198,121 after 15 years, with no monthly payments made. However, by opting to service just 25% of the interest, the client benefits from a 1% interest rate discount and will owe £143,012 after the same period, saving a substantial £39,381.
This table clearly illustrates how servicing interest can drastically reduce the amount owed over the loan’s lifetime. Such savings are particularly valuable for clients looking to preserve equity for future needs, such as care costs or passing wealth to beneficiaries.
A Shift in the Market
The introduction of this second interest-servicing product marks a major shift in the lifetime mortgage market, paving the way for more client-centric lending solutions. This innovation offers clients a valuable alternative to the traditional roll-up model, where compounding interest can quickly erode a property’s equity. For those able to make monthly payments, this option not only offers a way to manage borrowing costs but also provides greater peace of mind.
As more lenders explore ways to help clients manage the cost of borrowing, it’s clear that interest-servicing lifetime mortgages could represent the future of equity release. This is a key development for clients who want to balance borrowing flexibility with preserving home equity, ensuring that they are not only meeting their financial needs in the present but also safeguarding their long-term interests.
Is Equity Release Right for You?
Equity release is proving to be a flexible financial solution for many, whether it’s to clear a mortgage, improve a home, enjoy a dream holiday, consolidate debts, or simply boost income. However, it’s important to consider the long-term impact and weigh your options carefully.
If you’re curious about how equity release works and the steps involved, I’ve put together a helpful guide in my YouTube video: 10 Steps to Releasing Equity using a Lifetime Mortgage. It’s a great starting point for anyone considering equity release and wanting to understand how it could work for them.
Ready to find out more? Visit our dedicated later life lending page to arrange your free 10 minute discovery call!
Mike Jones
Later Life Lending Specialist
Mike Jones is a later life lending specialist who is responsible for the “Mewstone Later Life Lending” service. Mike has years of experience in retail banking as well as extensive knowledge of the later life lending sector.
Choosing to release money from your home is a big decision and it’s important for you to understand all the options available to you. This means that he will always offer you unbiased advice. It doesn’t matter to us which solution or lender is recommend, as long as it is the right one for you.