Interest-Only Lifetime Mortgage: How Interest-Paying Plans Work

An interest-only lifetime mortgage is a lifetime mortgage where you pay some or all of the monthly interest, so the loan does not grow as it would if interest rolled up. The amount borrowed is still repaid from the sale of your home when the last borrower dies or moves permanently into long-term care.

These plans are sometimes called interest-paying or interest-serviced lifetime mortgages. This page covers how the payments work, what happens if they stop, and the trade-offs. For how lifetime mortgages work in general, see our equity release guide. This is general information, not financial advice.

How an interest-only lifetime mortgage works

A standard lifetime mortgage usually has no monthly payments. The interest is added to the loan, and then interest is charged on that larger balance. This is called roll-up, and it means the debt compounds over time.

With an interest-only lifetime mortgage, you pay the interest instead of letting it build up. MoneyHelper describes interest-serviced plans as ones where you make monthly or one-off payments to reduce or stop the effect of interest rolling up.

Voluntary and mandatory payments

There are two broad kinds of plan, and the difference matters most if your income changes:

• Voluntary payments. You choose whether to pay, and how much. You can usually pay all the interest, part of it, or nothing.
• Mandatory payments. Paying the interest is a condition of the plan for a set period, sometimes called a payment term. The Equity Release Council calls these mandatory payment lifetime mortgages.

How interest-servicing works in practice

If you pay all the interest each month, the balance stays at the amount you borrowed. If you pay part of it, the balance still grows, but more slowly.

The difference over time can be large. For illustration, at around 7% a year a rolled-up debt can roughly double in around 10 years. Paying the interest avoids that growth, but it means a regular outgoing from your retirement income.

New lifetime mortgages from Equity Release Council members have had to allow penalty-free voluntary partial repayments since 28 March 2022, within limits each plan sets. That lets you reduce the capital too, not only cover the interest.

What happens if interest payments stop

This depends on which kind of plan you have, so it is worth knowing before you sign.

On a plan with voluntary payments

If you stop paying, the interest is normally added to the loan instead, and the plan carries on like a standard roll-up plan. MoneyHelper notes that some people choose monthly payments with the option to roll up later if the payments become unaffordable. The debt then starts to grow, and the plan documents set out how stopping and restarting payments work.

On a plan with mandatory payments

Here, missing payments breaches the terms of the plan. The Equity Release Council says that if mandatory payments are not made, the home is at risk of repossession. Its core protections continue provided you keep up payments during the mandatory period. After that period ends, members' plans must let you keep making repayments without charge, subject to the lender's criteria. The plan terms set out what happens to the interest from then on.

If payments are becoming hard to manage on either kind of plan, the lender and an adviser can explain what the plan allows.

Interest-only lifetime mortgage vs a RIO mortgage

A retirement interest-only (RIO) mortgage also involves paying interest each month. The key difference is that RIO payments are required for the life of the loan, so missing them could put your home at risk. RIO mortgages are regulated, but they do not automatically carry Equity Release Council protections. Our lifetime mortgage versus RIO comparison sets out the differences.

Trade-offs to weigh

Possible benefits:

• the debt can stay level, which may leave more for your estate;
• on voluntary plans, you can usually stop paying if money becomes tight;
• you keep the right to live in your home, subject to the plan's terms.

Possible drawbacks:

• the payments reduce your monthly income, possibly for many years;
• a fall in income, such as losing a partner's pension, can make payments harder;
• on mandatory plans, missed payments could put your home at risk;
• fees and early repayment charges still apply, as with any lifetime mortgage.

It can also help to compare paying interest with other routes. Downsizing avoids borrowing altogether, though moving has its own costs.

Next step

An FCA-regulated adviser can compare an interest-paying plan with roll-up and with the alternatives, and show how the balance could change if payments stop. Our guide to finding a regulated equity release adviser explains what to check. We do not provide financial advice.