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Interest-Only Equity Release

Considering an equity release mortgage on an interest-only basis? Read on to see if it is the right option for you.

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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: June 10, 2022

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 also providing you with cash. There are several types – one being 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?

An interest only lifetime mortgage is a loan that is secured against your home. Depending on many factors including your property’s value, your age and 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 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.

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How does it work?

Should your application be successful, an interest-only equity mortgage means you can release a lump sum from your home or have the same amount paid out to you in instalments.

Then, like many other mortgages, you pay a monthly repayment for the interest accrued. 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 each year too.

When it comes to paying back the loan, either 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 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 of what interest rate you could expect on an interest only equity release product.

At the time of writing, some products were attracting a rate as low as 3%. The highest interest is currently at 7%. Both will be hugely subject to change depending on the market conditions at the time of your application.

In terms of how much you can borrow, your lender will consider what you can afford. They’ll look at any salary, benefits, pension and savings you have to calculate what you can repay each month.

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:

calculator icon

Equity Release Calculator

You can use our equity release calculator to work out how much capital you can release from your home. Simply enter your age and the property’s value and the tool will do the rest.


Estimate if you're unsure
£
For joint applications the amount you can release is based on the age of the youngest applicant
years old

Maximum Equity you could release:

The amount is of your homes value, the maximum most borrowers your age can release.

Get Started with an Equity Release Specialist and find out exactly how much you could release.

Get Started

Eligibility criteria

Criteria and equity release caps aren’t usually any different for interest-only equity release compared to schemes where 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:

You can read more about how these factors might affect your application in our complete guide to equity release.

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 take into account your personal and financial circumstances and tailor their suggestions as a consequence.

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

Therefore, they can save you money – but also time. Get in touch with us so we can put you in contact 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 when compared to other 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 need to weigh up your decision carefully. 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

Upon taking the drawbacks into account and upon 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 release. The similarities being that equity released to applicants needs to be repaid when they pass away or go into a care home.

However, one big difference is that there is no lower age limit, so those under 55 can apply. Plus, applicants can also pay back the principal amount in addition to making interest repayments.

The interest repayments are mandatory, and, as a result, your home could be repossessed if you fall behind. Another essential idea to consider is that interest rates on these products usually are only fixed for a set period of time. Your repayments could therefore go up in the future.

Lengthening your mortgage term

If you’re nearing the end of an interest-only mortgage term, you could approach your lender to extend it if you are going to struggle to repay the outstanding balance. Your application will be dependent on your lender and how they view your situation.

Remortgage

You could 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 any equity release products can be complicated, including interest-only types. Due to the number of factors that lenders consider and the sheer number of lenders there are, choosing the best product and lender for your circumstances is a daunting task.

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 a specialist that is most appropriate for you and your needs. There is no obligation to use them, and your initial chat is free of charge. Call 0808 189 0463 or make an enquiry so we can match you with an equity release specialist today.

FAQs

Can you use equity release to pay off an interest-only mortgage?

Yes. If your interest-only mortgage term is coming to an end and you need funds to pay off the outstanding balance, you can release equity from your home for repayment. To be a workable solution, you will need to have enough equity in your home to repay your initial interest only mortgage.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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