The Definition of Interest-Only Equity Release Schemes
Because the loan is interest-only, you make repayments solely to cover the interest owing against your debt, usually every month.
Therefore, the lender will need to assess your income to be confident that you have the financial means to maintain the payments.
Using an Interest-Only Equity Release UK Product to Consolidate Debts
We're often asked whether an equity release product can be used to consolidate pre-existing debts or even repay a mortgage, and the answer is yes!
The key with an interest-only equity release product is to make sure the amount you borrow is enough to pay back the debt but that the interest cost will be manageable.
In many cases, you can clear all your debts, pay a low monthly interest cost, and have the assurance that when your property is sold, the lender will deduct only the original amount borrowed.
The balance from the sale passes to your estate to distribute to your beneficiaries as you wish.
Timing of the Payments on Interest-Only Equity Release Schemes
Most interest-only equity loans require a monthly interest payment. However, that is one of many possible structures.
You might make more frequent contributions if your mortgage agreement allows this or opt for ad hoc repayments when finances allow, reducing the total amount of debt secured against your home.
Insight From the Equity Release Advisers on Planning for Repayment
The original amount you borrowed is repaid when you pass away or move into care, and the debt will be the same ratio as you originally borrowed - e.g. 20% of your property value.
A surveyor will assess the valuation in case the property has increased or decreased in value and then arrange the sale.
The benefit of an interest-only equity release loan is that you know what you have borrowed, and the debt won't grow over time because you continue to pay the interest charges as you go.
Eligibility for Interest-Only Equity Release Explained
Interest-only equity release mortgages differ from lifetime mortgages because there will be an affordability element to the assessment process.
The lender needs to verify you have sufficient income to keep up with the interest payments.
Other factors include:
- Your age and health - you must be 55 or over to qualify, and your health can impact the total loan offered.
- Your property - the minimum value is usually £70,000, and lenders prefer to lend against homes of standard construction.
- Credit history - bad credit may not mean that you are ineligible but could affect the offered interest rates and maximum loan value.
Pros and Cons of Interest-Only Equity Release UK Products
If you're on the fence about whether an interest-only equity release mortgage is your preferred borrowing option, it's useful to compare the pros and cons.
Advantages of Interest-Only Equity Mortgages
- The interest rate can be fixed for the full term of the mortgage agreement.
- You can switch to a lifetime mortgage if anything changes.
- Some lenders will consider a further equity release loan in the future.
- You retain homeownership and have the right to live there for life.
Disadvantages of Interest-Only Equity Release Loans
- The loan income may impact your eligibility for benefits.
- The lender will sell your home eventually and use the proceeds to pay back the debt.
- Cashing in on your equity will reduce the amount you can leave in your will.
Borrowing Limits on Interest-Only Equity Release Schemes
The total amount you can borrow on an equity release mortgage will depend on several factors, such as:
- The valuation of your property.
- How much equity you own.
- Your earnings and wealth.
- Your age and health.
Most lenders will go up to 55% or 50% of the property value as a maximum and will be comfortable lending a higher Loan to Value ratio if you are older.
Using Retirement Income to Make Equity Release Mortgage Interest Payments
We're often asked about the repayment rules on an interest-only equity mortgage because most people are used to having to prove a regular income or employment before securing a mortgage.
Equity release is designed for retirees, and your pension income is a valid earnings stream you can use to make the interest payments.
Alternatives to Interest-Only Equity Release UK Mortgages
If you decide, for any reason, that an interest-only mortgage isn't for you, we may recommend a different product - if you aren't eligible or don't wish to sell your property at some point, for example.
Some of the related mortgage products you might consider are listed below.
- Lifetime mortgages are a form of equity release and come with a negative equity guarantee and the right to live in your home until you pass away or go into residential care. There are no interest payments, and the entirety of the debt is repaid on the property sale.
- Home reversion plans are similar but vary because you sell all or a proportion of your home to a lender at a below market value price. The same rule applies whereby the lender will sell the property if you die or move into care.
- Hybrid equity release plans allow you to pay all or some of the interest each month - but you aren't obliged to and can sometimes decide to make additional ad hoc payments.
- Remortgaging may also be a solution which won't carry any requirement for the lender to sell your home. Many homeowners qualify for a competitive remortgage, provided you can demonstrate a reliable income to cover the mortgage repayments.
Getting the Best Interest-Only Rates From Equity Release Advisers
The ideal approach to ensure you get the best possible interest rates on your equity release plan is to work with an independent, whole-of-market broker (rather than an in-house mortgage advisor).
As an independent brokerage, we assess your requirements and circumstances, suggest lenders best suited to your needs, and negotiate directly.
Another important reason to work with whole-of-market equity release advisers is that many product comparison sites you may find online include a very limited snapshot of the deals available. Many others, including broker exclusives, may be more attractive.
Using an Equity Release Product to Repay an Interest-Only Mortgage
There is often confusion between an equity release mortgage repaid on an interest-only basis and a standard interest-only residential mortgage.
If you want to repay a normal mortgage, you can do so with your equity release funds, whether your ongoing product is capital repayment or interest-only.
Lenders will normally be happy to accept this repayment option if your original repayment vehicle has fallen through or dropped in value.
Independent Support From Whole-of-Market Equity Release Advisers
If you wish to discuss any of the information we've discussed here regarding interest-only equity release mortgages, please contact the Revolution Finance Brokers team.
Our role is to ensure you select the optimal borrowing product with a full understanding of the costs and terms and secure a favourable offer from a lender we would recommend.
