Equity release to pay off interest only mortgages can be a better way to of releasing money built up in your house equity. If you are one who is looking for equity release to pay off interest-only mortgages, this article will guide you through the complete process. In this article, we will answer the most asked questions such as can you use equity release to pay off your interest-only mortgage, how can I pay off my interest only mortgage, and what are the disadvantages of using equity release to pay off your interest only mortgages, etc.

Equity release interest only

It seemed a good idea at the time – an interest-only mortgage significantly reduced your monthly mortgage repayments. But now that all good things have come to an end, you face the stress and anxiety of finding all that capital to repay.

Equity release will reduce the value of your estate and can affect your eligibility for means tested benefits

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Equity release interest only

How can I pay off my interest-only mortgage?

What is equity release?

Can I pay off an existing mortgage – including an interest-only mortgage – with an equity release mortgage?

What are the major drawbacks of using equity release to pay off a mortgage?

Next Steps – Equity Release to Pay Off Interest-Only Mortgages

FAQs – Interest only equity release

How can I pay off my interest-only mortgage?

Even with the most careful planning of your domestic resources, when an interest-only mortgage reaches full term, and the full capital amount needs to be repaid, it can come as something of a nasty shock. Where are you going to find those – not inconsiderable – funds?

Probably one of the first courses of action to come to mind is simply to arrange a further mortgage – remortgaging your home by using the advance of a new repayment or interest-only mortgage to pay off the capital on your current interest-only mortgage.

When making any such remortgage application, however, you’ll need to keep in mind that with the passage of time, you have grown older (with fewer years in which to repay any loan) and your financial or personal circumstances may well have changed too.

You can also contact a mortgage broker who can help you with the most suitable mortgage advice.

What you might not have considered – if you are above the qualifying age of 55 years – is the use of equity release to pay off your existing mortgage.

What is equity release?

Equity release is a method by which homeowners over the age of fifty-five can free up some of the equity otherwise locked into their home – with the home offered as security, a loan is made in the form of either a lump sum cash payment or a series of instalments (or a mixture of the two).

The principal vehicles for equity release are:

• lifetime mortgages – with neither the capital nor, if you so choose, the interest payable monthly but delayed until the end of the agreement when you die or move into long-term care but until then you continue to live in your home; or
• home reversions – a less widely-used method involves the sale of a proportion of the home in which you continue to live until your death or your move into long-term care when the equity release provider takes possession of that part of the home already sold.

It is probably clear, therefore, that equity release involves a very serious decision, with implications you will want to discuss in advance with professionals such as us here at NeedingAdvice.co.uk.

Can I pay off an existing mortgage – including an interest-only mortgage – with an equity release mortgage?

Just as the term suggests, equity release depends on your owning a reasonably substantial proportion of the equity in your home. That allows the equity release provider to advance a loan – a lifetime mortgage – using your home as security.

If you are currently making monthly payments on an interest-only mortgage and face the prospect of having to repay the outstanding capital within, say, 12 months from now, you can potentially avoid having to sell your home to make that repayment by arranging an equity release loan.

The principle is relatively simple and straightforward. The equity release provider advances a lifetime mortgage, which provides you with the funds with which to make some or all of the outstanding capital repayment of your current interest-only mortgage. Effectively, you will be exchanging your interest-only mortgage for a new lifetime mortgage.

Although amounts will vary from one provider to another, a typical equity release in these circumstances might realise around 21% of the value of your home when you are aged 55 – but this percentage will increase up to around a maximum of 56% the older you are.

Because it is a lifetime mortgage, there are no immediate capital repayments to be made. Depending on your financial circumstances, you might opt to continue paying monthly interest – although now these payments will be towards your lifetime mortgage and not the paid-off interest-only mortgage. Alternatively, you might allow the interest repayments to roll over until the conclusion of the equity release agreement (on your death or when you move into long-term care).

What are the major drawbacks of using equity release to pay off a mortgage?

Whether or not you have an interest-only mortgage or a repayment mortgage, equity release is by no means for everyone. There are disadvantages as well as benefits.

Perhaps the biggest drawback is the impact a lifetime mortgage will have with respect to beneficiaries of your estate when you die. Their inheritance will be negatively impacted by the need to sell your former home or repay the lifetime mortgage that it secures.

The inheritance you leave is further diminished by the interest repayments that might have been allowed to accumulate on the lifetime mortgage. As these are rolled over from one month to the next, and one year to the next, this can represent a considerable sum – which, of course, must be repaid at the conclusion of the equity release agreement.

Once the home in which you once lived is sold to repay the lifetime mortgage (capital and interest) there may be little, or no inheritance left for passing on to your loved ones.

Next Steps – Equity Release to Pay Off Interest-Only Mortgages

It will have become clear that equity release – including equity release to pay off your interest-only mortgage – is a decision that needs the most careful thought and consideration.

It is a decision on which you will want to consult professionals – such as us here at NeedingAdvice.co.uk, where we have the necessary expertise and experience to discuss all the implications and guide you through the application process.

FAQs – Interest only equity release

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

Yes, you can definitely use equity release to pay off your interest-only mortgage. This is because there is no limit on the amount you can borrow from the equity release scheme. You just need to make sure that you do not exceed the maximum loan amount allowed by the lender. The maximum loan amount varies depending on the type of property you own. For example, if you own a detached home with a value of £250,000, then the maximum loan amount would be £250,000. However, if you own a semi-detached or terraced house worth £200,000, then the loan amount would be limited to £150,000. If you are interested you can contact a specialist mortgage broker before starting your mortgage application.

How do I get rid of my interest only mortgage?

You may want to consider selling your property before paying back the loan. This would give you access to the cash you need to make the repayment. However, if you sell your home, you’ll lose out on any potential capital gains tax (CGT) benefits.

If you decide not to sell, there are other options available to you. The first option is to refinance or remortgage with another lender. Another option is to borrow against the equity in your home by taking out a secured personal loan.

If you choose to remortgage, it is important to ensure that you find a lender willing to lend you enough money to cover the outstanding amount plus the cost of repaying your existing mortgage.

The second option is to take out a secured personal loan from a bank or building society. You could also ask your current lender about refinancing their mortgage into a fixed rate deal.

What happens when I pay off my interest-only mortgage?

When you pay off your interest-free mortgage, you will no longer be required to make regular payments toward the principal. Instead, you will receive a lump sum payment which will include the remaining balance of the original loan plus any accrued interest.

This means that you won’t have to worry about making regular payments again.

However, you should note that once you have paid off your interest-only loan, you will still be responsible for paying the full amount of the original loan.

What is the age limit for repaying interest only mortgages with equity release?

Every mortgage lender is different age limits for mortgages for equity release. Some lenders allow borrowers to repay an interest-only mortgage until they reach the age of 75 years old. Others require borrowers to wait until they turn 65 years old.

It is important to check what the age limit is for your particular circumstances.

If you are planning to apply for a new mortgage with a lender who has an older age limit, you might want to think carefully about whether this is something you really want to do. It is possible that you could end up having to pay more towards your mortgage than you originally expected. So, it is always better to contact a qualified mortgage advisor before starting the application.

Can I use equity release to pay down my credit card debt?

Yes, you can use equity release to pay your credit cards and other unsecured debts. In fact, many people use equity release schemes to help them manage their finances better.

What is a lifetime mortgage?

A lifetime mortgage is a form of long-term borrowing where the borrower agrees to pay a set amount each month over a specified period of time.

In return, the lender agrees to provide the borrower with a lump sum at the end of the mortgage

Why should I choose interest-only equity release?

There are several reasons why you may wish to opt for an interest-only equity release scheme.

Firstly, you may be able to save yourself thousands of pounds in interest charges. If you were to pay back the whole amount of your mortgage, you would be charged interest every single month. This would mean that you would need to pay back your entire mortgage within just a few short years. However, if you chose to go for an interest-only mortgage, then you will not be charged interest on the capital borrowed.

Secondly, you may be able to avoid the hassle of having to make monthly payments. When you pay back your mortgage, you will receive a one-off lump sum instead of regular payments. You will also be free from worrying about making regular monthly payments.

Finally, you may be able to find a cheaper rate of interest if you choose to take out an interest-only mortgage. The reason for this is that most lenders charge higher rates of interest on loans taken out for shorter periods of time.

Can I use the equity release for home improvements?

Yes, you can use the equity release for home improvements. Many people use equity release to improve their homes or even build extensions.

However, there are some things which you should keep in mind when using equity release to fund home improvements. Firstly, you must ensure that any work carried out does not increase the value of your property by more than 10% above its current market value. Secondly, you should ensure that you obtain written permission from your lender before carrying out any work. Finally, you should only carry out work which is necessary and affordable.

A LIFETIME MORTGAGE WILL REDUCE THE VALUE OF YOUR ESTATE, WILL NOT BE SUITABLE FOR EVERYONE AND MAY AFFECT YOUR ENTITLEMENT TO STATE BENEFITS.