If your clients decide at the outset (or at a later stage) to not repay the interest each month on a Lifetime Mortgage (as is allowed), then the benefit of this is understandable, as it removes one major money worry for them.

The harsh reality though, is that compound interest will be applied to the loan amount. Against an example interest rate of 6.5%, the full amount owed would double after about 11 years.
 
Is that an issue?
If your clients are not concerned about maximising the inheritance they deliver for their beneficiaries, then possibly not. And with rules set out by the Equity Release Council, no debt would be left to those inheriting, should the amount that’s eventually rolled up exceed the value of the home.
 
However, even if they’re not worried about leaving a sizeable inheritance, they do need to be mindful that it may be an issue if they need further funds down the line, for example, to purchase a new home.
 
Property price growth?
House prices eased as we moved through 2023, but property has demonstrated sizeable long-term growth in the past.
 
If we consider the last 30 years, we’ve seen a 500% growth in property values.
 
If we draw a comparison to the amount owed doubling after 11 years, then the average property price has risen at around 4.3% a year over the last 11 years.
(Sources: Nationwide, House Price Index, Q4 2023 vs. ‘93 & ‘12)
 
For the example below, we’ve placed the average property value and loan amount for a lump sum borrower, and considered what could happen if the annual property price rise was a more conservative 2.5%.
 
Of course, there’s no guarantee of property price rises, and the impact of inflation would need to be considered, but it shows that the amount of equity remaining could be broadly similar after 11 years, if no interest was paid off.
 
However, if the borrower decided to pay the £70,361 of interest in this example, they’d benefit from a saving of almost £28,000 vs. the interest roll-up amount of £98,323. 
(Source – for chart below – Equity Release Council, H1 2023 data, Autumn 2023 Market Report)

Please contact me to hear more…