Many homeowners opt for interest-only mortgages due to their lower monthly payments.
With this type of mortgage, you only pay the interest on your loan each month, not the original borrowed amount (known as the “capital”). However, when the mortgage term ends, you’ll be expected to repay that capital sum in full.
This can pose a significant financial challenge, especially as you get older.
For homeowners over 55, equity release could offer a way to resolve this issue.
Equity release allows you to access some of the money that has built up in your property over the years. This could potentially provide the funds needed to repay your interest-only mortgage and allow you to remain in your home without the ongoing burden of monthly repayments.
Please Note: The content on this page is designed to be a helpful starting point for understanding equity release. It explores the concept, different plan types, and the general process involved. However, equity release is a complex financial decision with significant implications for your long-term financial security. To determine if equity release is the right option for you, it’s essential to consult with a qualified financial adviser who specialises in equity release products.
Let’s get one thing straight
Before we get into how an equity release plan can help with an interest only mortgage, remember this:
you are not paying off your interest-only mortgage.
You are moving the debt from one type of mortgage, to another.
The debt is still there and it will need to be paid off (properly) at some point.
Understanding Interest-Only Mortgages
Let’s break down how interest-only mortgages work and why they differ from traditional repayment mortgages:
Interest-Only
With an interest-only mortgage, your monthly payments only cover the lender’s interest on your loan. You’re not chipping away at the original amount you borrowed (the capital).
Repayment
With a repayment mortgage, each monthly payment covers a portion of the interest and a portion of the capital. Gradually, you pay off the entire loan over the mortgage term.
The Repayment Challenge
With an interest-only mortgage, the entire capital sum remains outstanding until the end of your mortgage term. At that point, the lender will expect full repayment.
Doing this can take quite a bit of discipline and organisation.
You will find more useful information in our Guide to interest only mortgages
So what happens when an interest only mortgage term ends?
When your interest-only mortgage term ends, it’s time to repay the capital sum you originally borrowed. The lender needs this to be a lump sum and will contact you a few times during the final 12 months (so you don’t forget!).
Here are the typical options homeowners consider:
- Remortgaging: Switching to a standard repayment mortgage could spread the cost over a new term. However, lenders often have age restrictions, making it more difficult to qualify as you get older.
- Downsizing: Selling your current home and purchasing a smaller property could release enough money to pay off the mortgage and potentially leave you with extra funds.
- Using Savings or Investments: If you’ve diligently saved or have investments, you might be able to repay the loan in a lump sum.
Unfortunately, as time goes on, these options can become less viable.
- Remortgaging Difficulties: Stricter lending criteria for older borrowers can make it harder to secure a new remortgage.
- Health Considerations: Downsizing might become less appealing if your health changes or you need specific adaptations in your home.
- Depleted Savings: Unexpected expenses or changes in income can make it difficult to accumulate the large sum needed.
It’s these potential challenges that make equity release worth considering for some older homeowners in this situation.
You will find more useful information in our article: What happens when my interest only mortgage ends?
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How Equity Release Can Help
If you’re a homeowner aged 55 or over and facing the end of your interest-only mortgage term, equity release could potentially be an option to consider.
Equity release is a way to tap into the equity value that has built up in your home over the years.
The most popular type of equity release for this purpose is a lifetime mortgage but you may also want to consider home reversion schemes.
You receive a lump sum from the lender. Crucially, you don’t have to make any monthly repayments and you don’t need to move home.
Instead, the interest on the lifetime mortgage loan rolls up (compounds) over time.
The money you receive from a lifetime mortgage can be used to pay off your outstanding interest-only mortgage balance. This eliminates the need to find a large lump sum at the end of your term.
The lifetime mortgage itself, along with the accumulated interest, is eventually repaid when you pass away or move into long-term care. This usually happens when your home is sold.
Whether you can successfully use a lifetime mortgage in this way will depend on how much equity you have in your house.
The available loan to value percentages are a lot lower for lifetime mortgages, when compared to standard mortgages. But they are higher for older borrowers.
You will find more useful information in our article: What does loan to value mean?
Is Equity Release the Right Choice?
To answer that question you will need to carefully consider many different factors, and seek advice from an equity release specialist.
The first step is determining if your home has enough equity to cover your outstanding mortgage balance. The amount you can release depends on factors like your age and the value of your property.
Generally, the older you are, and the more your property is worth, the more equity you’ll likely be able to access.
It’s important to compare equity release to other potential solutions.
If you’re in relatively good health and have a steady income, a mortgage adviser might be able to discuss other options like retirement interest-only mortgages (RIOs).
These might offer a way to stay in your home without releasing equity.
Equity release can be an important lifeline for many people, but it isn’t the answer for everyone.
We can help you find a whole-of-market equity release specialist.
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Here are links to further information about some of the topics we have covered:
Interest only mortgage guide
In this guide you can learn about interest-only mortgages, how they work and who they are suitable for.
What happens when my interest only mortgage ends?
When it comes to mortgages, there are a lot of things to consider. But one of the most important is what will happen when your mortgage term ends.
What does loan to value mean?
When you borrow money to buy a home, the loan is typically expressed as a percentage of the property’s value. This is known as the loan-to-value ratio (LTV).
What is a RIO mortgage?
You’ve probably come across the term ‘RIO mortgage’. But what exactly is a RIO mortgage, and how does it work?
The Complete Guide to Equity Release
Our guide to unlocking the cash from your home using an equity release plan.
What are the different mortgage repayment methods?
Although repayment mortgages are the most popular, there are actually three ways that a mortgage can be setup.
