Interest-Only Equity Release

Equity release is a way of accessing the capital you have built up in your property by taking a loan to replace a traditional mortgage and providing you with cash. There are several types, one of which is interest-only.

We explore the details and nuances behind that specific type of loan here so you can decide whether it’s an option for you. We identify the benefits and drawbacks along with alternatives that could be an option if this type of finance does not suit your needs.

What is interest-only equity release?

Interest-only equity release is a type of mortgage product aimed at over-55s. It allows them to access the capital they have tied up in their homes as a loan with no capital repayments. The most common type of interest-only equity release is an interest-only lifetime mortgage.

An interest-only lifetime mortgage is a loan secured against your home. Depending on many factors, including your property’s value, your age, and your income, you could release a cash lump sum by taking out one of these products.

You are allowed to pay all (or part of) the interest accrued each month on the amount you borrow. In doing so, you can stop your loan balance from growing, which can protect how much your estate is worth when you pass away.

Ordinarily, equity-release mortgages do not require any repayments. Instead, when you pass away or move into long-term care, the amount owed is repaid – usually through the sale of your home.

How does it work?

If your application is successful, an interest-only equity mortgage will allow you to withdraw a lump sum from your home or receive the same amount in instalments.

Like many other mortgages, you repay the interest accrued monthly. If you choose to pay the total interest charge each month, your loan amount will stay the same and not increase.

Even if you choose to pay only a portion of the interest each month (based on what you can afford), you will find that the remaining equity in your home has not been eaten into as much when it comes to repaying the loan. Some providers may allow you to repay some of the principal yearly.

When paying back the loan, when you pass away or go into long-term care, your property will be subject to a valuation conducted by an independent surveyor. It is then sold, and the loan is repaid with the proceeds.

What interest rate to expect

All application outcomes will vary according to the lender and the customer. However, it is handy to have a ballpark figure, and the table below can help with this.

Please note that the above rates are purely for example purposes. They were accurate at the time of writing but are subject to change. The best way to find the most up-to-date deals is to speak to a mortgage broker.

Equity Release Calculator

If you’d like to find out how much equity you may be able to release from your property, take a look at our easy-to-use calculator here:

Eligibility criteria

Criteria and equity release caps aren’t usually any different for interest-only equity release schemes than for schemes in which the borrower makes no monthly payments.

The amount you can release from your home depends on how your potential equity release provider assesses your eligibility and what you can afford.

The lender will consider the following as part of your application:

• The loan-to-value (LTV) ratio
• Age and life expectancy
• Income 
• Property type
• Property Location
• Credit history

How a broker can help you get the best interest-only deal

Brokers can prove invaluable in an application for an interest-only equity release product. They will consider your personal and financial circumstances and tailor their suggestions.

Their in-depth knowledge of interest-only products on offer and what specific lenders want regarding eligibility criteria can make your application successful—perhaps for a higher amount and at a lower rate.

Therefore, they can save you money and time. Contact us so we can connect you with an advisor today.

Why choose interest-only equity release?

Interest-only equity release frees up funds to spend how you wish, which is understandably an attractive prospect. You can use those funds to help support your retirement, help give offspring cash towards their own house deposit, or even consolidate other debts.

However, these products have other benefits than equity-release loans, such as home reversion plans.

• You keep full ownership of your home
• Your loan balance can remain constant
• You can opt to switch to another lifetime mortgage
• The interest rate is fixed for the entire term

Other things to consider

Before you choose to release equity from your home, you must carefully weigh your decision. Taking money from your home, whether it is through a lifetime mortgage or on an interest-only repayment structure, will usually mean your estate is worth less when you pass away.

You will subsequently have less to leave your heirs, and there may be inheritance tax implications, too. This can be exacerbated should your house decrease in value, resulting in a lower-than-anticipated sale price.

You should also carefully consider the impact on any benefits you receive. Your entitlements could be affected by the equity you release, and your total income could be reduced as a consequence.

Alternatives products

Considering the drawbacks and advice from an expert advisor, you may want to consider other options.

The following could be more suitable for your situation:

Retirement interest-only (RIO) mortgages

RIO mortgages are similar to interest-only equity releases. The difference is that equity released to applicants must be repaid when they die or move into a care home.

However, one big difference is that no lower age limit exists, so applicants under 55 can apply. Applicants can also repay the principal and make interest repayments.

Interest repayments are mandatory, and if you fall behind, your home could be repossessed. Another essential consideration is that interest rates on these products are usually only fixed for a set period of time. Therefore, your repayments could go up in the future.

Lengthening your mortgage term

If you’re nearing the end of an interest-only mortgage term and will struggle to repay the outstanding balance, you could ask your lender to extend it. Your application will depend on how your lender views your situation.

Remortgage

You may be eligible for a remortgage, and if you are, you may find that the interest rate you attract is lower. You could, therefore, access the money you need by releasing equity yet with cheaper repayments.

Get matched with an equity release specialist.

Applications for equity release products, including interest-only types, can be complicated. Due to the many factors that lenders consider and the sheer number of lenders, choosing the best product and lender for your circumstances can be daunting.

That’s why talking with a specialist can be so advantageous. They already have expert knowledge of the market, so they can identify the best product from the best lender for you. This knowledge will improve your chances of a successful application – achieving the amount you need to release with as low a rate as possible.

Our broker matching service can connect you with an equity release specialist who is most appropriate for you and your needs. You are not obligated to use them, and your initial chat is free of charge. Call 0330 818 7026 or make an enquiry so we can match you with an equity release specialist today.