However, in the wake of September 2022’s mini-budget, lifetime mortgage interest rates have increased sharply, and it’s unlikely we’ll see them fall back to pre-mini-budget levels, even in the medium-term. This, combined with a lifetime mortgage’s compound interest, can mean a prohibitive total cost of borrowing for some over-55s – particularly younger non-retired borrowers or those who still have appetite to serve regular payments in later life.
But customer need is still present - arguably more so than ever. In fact, according to Key, almost 4 out of 5 over-55s with a fixed rate mortgage are concerned about being able to afford their monthly repayment once their current deal comes to an end. That’s why now is the perfect time for innovation in the equity release sector once again, and Standard Life Home Finance is helping lead the market into a new chapter with our Horizon Interest Reward lifetime mortgage.
What is an Interest Reward lifetime mortgage?
A Horizon Interest Reward lifetime mortgage rewards customers with an interest rate discount when they commit to set monthly interest payments for a specific payment term.
Available on most Standard Life Home Finance Horizon lump sum plans, the discount applied is based on the plan, the amount of interest paid and the payment term. The more interest paid and the longer the term, the larger the interest rate discount – with the largest discount available to those who commit to paying 100% of the interest for 15 years.
Available on Horizon lump sum plans only. From Horizon 300 upwards
| Horizon Interest Reward discount - Horizon 300 to 350 | |||
| Interest Payment / Years | 5 years | 10 years | 15 years |
| 25% | 0.02% | 0.05% | 0.07% |
| 50% | 0.05% | 0.09% | 0.14% |
| 75% | 0.07% | 0.14% | 0.20% |
| 100% | 0.09% | 0.18% | 0.26% |
| Horizon Interest Reward discount - Horizon 400 to 500 | |||
| Interest Payment / Years | 5 years | 10 years | 15 years |
| 25% | 0.02% | 0.05% | 0.08% |
| 50% | 0.05% | 0.10% | 0.15% |
| 75% | 0.08% | 0.15% | 0.23% |
| 100% | 0.10% | 0.20% | 0.30% |
| Horizon Interest Reward discount - Horizon 530 to 650 | |||
| Interest Payment / Years | 5 years | 10 years | 15 years |
| 25% | 0.04% | 0.08% | 0.11% |
| 50% | 0.08% | 0.15% | 0.23% |
| 75% | 0.11% | 0.23% | 0.34% |
| 100% | 0.15% | 0.30% | 0.45% |
If the plan holder makes all interest payments throughout the agreed payment term (5, 10 or 15 years), their interest rate discount will remain in place for the remaining life of the loan.
Plan holders can miss up to the value of three months’ payments throughout the agreed payment term – which they’re able to make up in order to retain their interest rate discount.
Should a value greater than three months’ payments be missed during the agreed payment term, the discount will be automatically removed and the customer’s Horizon Interest Reward lifetime mortgage will revert to a roll-up lifetime mortgage.
What are the benefits of a Horizon Interest Reward lifetime mortgage?
Later life can sometimes bring financial uncertainty. That’s why a Horizon Interest Reward lifetime mortgage is flexible; allowing your clients to choose how long they want to commit to making interest payments (5, 10 or 15 years), and how much they want to pay (25%, 50%, 75% or 100% of the interest).
And even if circumstances change, a Horizon Interest Reward lifetime mortgage can adapt, as it also features the same protections as other Standard Life Home Finance products. That includes:
- Guarantee of tenure
- Fixed interest rate for both discounted and non-discounted terms
- Permanent right to reside
- No negative equity guarantee
- Ability to make ad-hoc repayments
- Porting
- Downsizing protection from day one
- Fixed ERCs for just eight years
Robert Green is a 71-year-old homeowner from Bristol. He’s looking for a way to repay his existing £85,000 mortgage as well as make some home improvements. This totals a little over £100,000.
Robert’s property is currently valued at £400,000, and after speaking with his adviser, Robert believes equity release could be a viable financial solution to help him meet his needs.
Mr Green is still able and willing to make payments towards his later life mortgage to help reduce his total cost of borrowing. And as part of his advice journey, Robert’s adviser presents an illustrative example of how making payments with a Horizon Interest Reward lifetime mortgage can help save him thousands.
The adviser presents three scenarios, all of which span over a 20-year period:
- Mr Green makes no payments on a roll-up lifetime mortgage
- Mr Green takes out a Horizon Interest Reward lifetime mortgage and pays 25% of the interest each month for five years, which then reverts to a roll-up lifetime mortgage for the remaining 15 years. Robert made all of his payments during the agreed payment term, therefore his interest rate discount remains applied for the remaining life of the loan
- Mr Green takes out a Horizon Interest Reward lifetime mortgage and pays 100% of the interest each month for 15 years, then reverts to a roll-up lifetime mortgage for the remaining five years. Robert made all of his payments during the agreed payment term, therefore his interest rate discount remains applied for the remaining life of the loan
As the table above shows, in scenario 2, by making 25% interest payments (£125/month) for just five years, Mr Green could secure a gross saving of almost £26,000 compared to if he made no repayments at all. That’s thanks to both his discounted interest rate and reducing the amount on which compound interest is charged.
In scenario 3, with a larger interest rate discount applied and paying 100% of the interest for 15 years (£475/month), Robert boasts a gross saving of over £205,000 compared to scenario 1 and more than £179,000 against scenario 2.
This additional £179,000 of retained equity versus scenario 2 allows Mr Green to retain greater financial flexibility for the future, which could help him in several ways, including covering care costs, funding a further advance or contributing to a larger estate.
By serving some or all of the interest, and subsequently benefiting from a lower interest rate with a Horizon Interest Reward lifetime mortgage, Robert’s long-term financial options are less restricted, giving him more control over his financial future.
How could Horizon Interest Reward benefit my client?
There has been a significant shift in the mortgage landscape for consumers since the mini-budget. As part of that, interest rates have increased from a decade of historic lows. This has put an even bigger focus on clients' total cost of borrowing and an increased importance on helping them understand ways to reduce this over the duration of their plan.
However, a Horizon Interest Reward lifetime mortgage helps mitigate some of the impact of compound interest, resulting in a lower cost of borrowing and an increased likelihood of leaving an inheritance or having further funds to access in the future.
It meets the needs of those clients who have an appetite to make contractual payments in return for a lower interest rate. And the product fills an important gap in the market between those requiring full interest served and those that don’t have a payment period by allowing the client to personalise their payment term to suit their needs.
How does a Horizon Interest Reward lifetime mortgage compare to a retirement interest-only mortgage?
Versus a retirement interest-only mortgage (RIO), customers who opt for a Horizon Interest Reward lifetime mortgage are better protected.
Firstly, there’s no credit score dependency or the need to prove affordability for life. And the plan holder also benefits from all of the Equity Release Council’s guarantees, including fixed interest rates, the no negative equity guarantee and guaranteed tenure – even if they fail to meet their interest payments in the future.
Customers also have the ability to choose their interest payment amount and payment term with a Horizon Interest Reward lifetime mortgage, whereas with a RIO, it’s set for the life of the plan. However, by servicing all the interest through a RIO, the customer could benefit from owing a smaller amount when the plan ends.
When is a Horizon Interest Reward lifetime mortgage not right for my client?
You, of course, will have clients who aren’t suitable for a Horizon Interest Reward lifetime mortgage. Here are some examples of when that may be the case:
| When an Interest Reward lifetime mortgage isn't right for your client | ||||||
| They’re not willing to make interest payments | They’re under 55 years old and/or they don’t own their own home | Their property is worth less than £99,000 | They’re able to afford an alternative product that would reduce their cost of borrowing | They need to borrow less than £15,000 or more than £1.5m | They’re not willing to repay any existing mortgage secured against their home | They want to use the money for gambling, short-term borrowing needs, investment or business purposes |