Interest Only Equity Release
If you are a homeowner in the UK, over the age of 55, you may be eligible for an interest-only equity release. This type of equity release allows you to release equity in your home tax free without having to sell it. You can use the money for any purpose, such as paying off other debts, going travelling, or helping a loved one get on the property ladder.
There are, of course, pros and cons to this type of equity release product and depending on your personal situation, it may or may not be a suitable option for you. This article will take you through some common questions associated with interest-only equity release so that you can better understand it as an option.
Topics that you will find covered on this page
What is interest only equity release?
An interest only mortgage is a form of equity release that allows you to release equity from your home while only making monthly payments on the interest.
If you choose to get equity release with an interest only mortgage, you can choose how long you want to make interest payments for. The loan is usually repaid when you die or move into long-term care.
How to know if it is a good option for you
Some people like the idea of paying off the interest in regular monthly payments as it means that the amount owed stays the same, and so less of a chunk is taken out of the property value of the house when it is eventually sold. It can be a great option if you would like to use equity release to help a member of your family financially, but you don’t want to drastically reduce your future inheritance.
In general, if you have a good income, you might prefer to take care of the interest payments now, and retain as much equity in your property as possible.
If you’re thinking about taking out a lifetime interest only mortgage, you should make sure that you consult a financial adviser. They will be able to assist you in determining how much money you may release and the potential effects on your finances. An advisor will be able to give you a better idea of how much you could get than using an equity release calculator.
What makes interest only equity release different?
The main difference with interest only lifetime mortgages, in comparison to other types of lifetime mortgages, is that an interest only equity release loan allows you to pay back the interest on a monthly basis, ensuring that the overall amount owed stays constant.
Some homeowners prefer this option, since the outstanding balance is lower than if they had chosen to roll up the interest.
The rest of the process is similar to other types of lifetime mortgages. When you die or move into long term care, the remaining balance will be paid back through the proceeds of the sale of your home. Any money remaining from the sale can be inherited by those named in your will.
Who is eligible for interest only equity release?
There are a few factors which determine whether or not you will be eligible for interest only equity release. Firstly, you must be over the minimum age of 55, you must live in the UK, be mortgage free, and your property must be worth at least £70,000.
They will also assess your health as this will affect how long it will be until the loan is paid back.
Lenders will most likely perform a credit check to make sure that there are no other debts secured against your home. This is because your property is the main guarantee that the lender will get their money back.
If you are found to have additional debts, the lender may place a condition on the mortgage, asking that those debts are repaid as part of the equity release. Your existing mortgage will, of course, have to be paid off before you are able to release tax free cash from your home.
It is likely that an independent surveyor will be sent to assess your home to make sure that it meets the criteria of the lender in terms of future saleability.
These things may sound intimidating but in general, this type of product should be easier to get than other types of residential mortgage and a poor credit score should not be such an issue.
How does it work?
The good thing about this type of plan is that they are relatively flexible. In general, the level of equity release interest to be repaid can be chosen by you so you can fit the payments around your personal financial planning. The interest rate can also be fixed for life so you can better plan your retirement finances.
How much you choose to repay monthly might depend on factors such as your income, how much of a loan you have taken and whether you want to leave a significant inheritance to your surviving family members.
It is strongly advisable to seek professional advice before deciding on your level of contribution as it could have a big impact on the future value. You should also check whether you will have to pay any early repayment charges if you choose to pay off the plan earlier.
"If you are a homeowner in the UK, over the age of 55, you may be eligible for an interest-only equity release. This type of equity release allows you to release equity in your home tax free without having to sell it."
If you pay less than the equity release interest charged, you’ll have a “roll-up” effect. However, the remaining debt will still be less than if you had chosen to make no payments at all.
Most homeowners in this position choose to fully repay the interest each month as they like to keep the total amount owed at a level balance.
Lastly, you can choose to stop the payments at any time. You will still be able to remain in your home, but the interest accrued will be added to the amount you owe, and the plan will essentially become a roll up lifetime mortgage.
The latest equity release interest rates as at 1 April 2024
The table below shows you the latest rates, as at 1 April 2024, for lifetime mortgages from some of the leading equity release providers in the UK.
| Product | Provider | Interest Rate | Incentives |
|---|---|---|---|
| 5.26% | |||
| 5.31% | |||
| 5.46% | |||
| 5.58% | |||
| 5.60% | |||
| 5.60% | |||
| 5.61% | |||
| 5.61% | |||
| 5.63% | |||
| 5.65% |
How much could you borrow?
How much you could borrow will be decided by a number of factors such as your age, health and the market value of your property. Older borrowers or those with health conditions may find that the amount of money released is more than for younger borrowers.
Some lenders offer the use of an interest only equity release calculator to give you an idea of how much equity you could release on their plan. However, you should remember that this just offers a rough estimation, not an exact figure. It is advisable to talk to a mortgage advisor for a more accurate idea of what you could borrow, dependent on your own personal circumstances.
Benefits of an interest only equity release mortgage
Like with every equity release scheme, there are advantages and disadvantages to interest only lifetime mortgages.
Firstly, let’s look at the advantages. Unlike conventional mortgages, interest rates can actually be fixed for the entire length of the plan, so you can plan your retirement finances with greater peace of mind.
You are also not tied into any payments. If something comes up in your life and you no longer want to make regular payments, you can switch to a different form of mortgage, such as a roll up plan, and leave the interest payments to be paid out of the proceeds of the sale of your home.
It is tailored for those in retirement, so it is easier to secure the loan in the first place. This is because equity release providers generally don’t look at your income, only at your age and the value of your property.
Finally, it is a popular choice for those who want to release some equity but want to preserve a certain amount of value in their property for their beneficiaries.
Risks of an interest only lifetime mortgage
You should also consider the risks of an equity release lifetime mortgage. Some of these are not just applicable to interest only equity release but to equity release in general.
Firstly, though you don’t pay tax when releasing equity, it may affect your entitlement to other means-tested benefits. You should discuss with an advisor whether this is a risk that you should take in your situation.
While you could benefit from property prices going up when it comes to selling your home to pay off the debt, you should be prepared for the possibility that the value of your house could have decreased. This is something to think about if you are concerned with the size of inheritance that you will be leaving.
It may sound obvious, but making regular monthly repayments on interest will add to your overall monthly spends, and you should make sure that you have budgeted sufficiently for your retirement. Interest rates can sometimes be higher due to the fact that they are fixed for the duration of the plan, so you need to make sure that you can afford them.
Finally, it is good to remember that how much cash you will be able to unlock from an interest only mortgage does depend on your age and your property, so what works for one person may not work for another.
Alternatives to an interest only lifetime mortgage
If you are not sure that an interest only mortgage plan is right for you, then you will be relieved to know that there are a number of different equity release products for you if you are looking to free up some cash in retirement. A few of these options are detailed below.
Home Reversion Plan
One option available to you is a home reversion plan. With this type of equity release, you sell a proportion of your property to the home reversion provider in exchange for a cash lump sum or regular payments. You will receive just a portion of the value of your home, but you will be able to continue to live there without having to pay any rent.
Rollup Lifetime Mortgage
A roll-up lifetime mortgage allows you to make no monthly payments at all. In this plan, the interest is simply added to the original loan, and the whole amount will be repaid from your estate once you pass away or move into long term care.
Hybrid Equity Release
This could be a good option for homeowners who want a bit more flexibility. It allows you to pay some or all of your monthly interest payments, but you can also stop paying whenever you like and add the interest to the original amount borrowed. At this point, it essentially turns into a rollup mortgage.
Drawdown Lifetime Mortgage
A drawdown lifetime mortgage is a similar concept to a roll-up lifetime mortgage, but you take the loan in instalments as and when you need it, rather than taking it as one lump sum. This is a good option for people who intend to live on their payments, rather than gifting it to a family member.
Flexible Lifetime Mortgage
With a flexible lifetime mortgage, you can choose to make voluntary payments to reduce the total amount of your initial loan.
Enhanced Lifetime Mortgage
An enhanced lifetime mortgage means that how much you can borrow is dependent on your health. The poorer your health, the more you can borrow, and sometimes at better rates.
Retirement Interest Only Mortgages
A Retirement Interest Only mortgage is similar to other equity release plans but there is no minimum age requirement, and it is aimed at any retirees who think they might struggle to take out a standard interest only mortgage. They can use retirement income to pay back the monthly interest and then the outstanding mortgage is paid off after death or transfer into care.
These are just a few different ways of taking equity release. Remember that with all forms of equity release schemes, you will still be entitled to your state pension, but your eligibility for any means tested benefits may be affected.
Final Thoughts
Whatever form of equity release plan that you end up using, you should make sure that you only borrow from a lender authorised and regulated by the Financial Conduct Authority.
The Financial Conduct Authority has a list of authorised lenders who have to follow specific borrowing practices, for example, offering a ‘no negative equity guarantee’, so you will know that your money is always in safe hands.
For more equity release advice, contact a mortgage advisor or seek independent legal advice to find out how you can make the most out of your property value and best release tax free cash.
Article author
Katy Davies
I am a keen reader and writer and have been helping to write and produce the legal content for the site since the launch. I studied for a law degree at Manchester University and I use that theoretical experience, as well as my practical experience as a solicitor, to help produce legal content which I hope you find helpful.
Outside of work, I love the snow and am a keen snowboarder. Most winters you will see me trying to get away for long weekends to the slopes in Switzerland or France.
Email – [email protected]
Frequently Asked Questions
What is interest only equity release?
An interest only mortgage is a form of equity release that allows you to release equity from your home while only making monthly payments on the interest.
If you choose to get equity release with an interest only mortgage, you can choose how long you want to make interest payments for. The loan is usually repaid when you die or move into long-term care.
Who is eligible for interest only equity release?
There are a few factors which determine whether or not you will be eligible for interest only equity release. Firstly, you must be over the minimum age of 55, you must live in the UK, be mortgage free, and your property must be worth at least £70,000.
How much could you borrow?
How much you could borrow will be decided by a number of factors such as your age, health and the market value of your property. Older borrowers or those with health conditions may find that the amount of money released is more than for younger borrowers.
Flexible Lifetime Mortgage
With a flexible lifetime mortgage, you can choose to make voluntary payments to reduce the total amount of your initial loan.
