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Is interest only equity release right for you?
The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.
Any references to tax-free or tax treatment are based on our understanding of current legislation and tax treatment at the time of writing, which may of course change in the future.
If your interest-only mortgage is coming to an end and you are worried about repaying what you owe, you are not alone.
Many UK homeowners, particularly those who took out interest-only deals in the 1990s and 2000s, are facing exactly this challenge. The good news is that there are options available, and equity release is one of them.
So, can you use equity release to pay off an interest-only mortgage? The short answer is yes. But it is not the right choice for everyone.
This guide walks you through how interest-only equity release works, who is eligible, the pros and cons and the alternatives so you can feel confident about your next step.
What is an interest-only mortgage and why can it be a problem?
With an interest-only mortgage, your monthly payments only cover the interest on the loan, not the loan itself. That means when your mortgage term ends, you still owe the full amount you originally borrowed.
For example, if you borrowed £150,000, you still owe £150,000 at the end of the term, regardless of how many years of payments you have made.
Many borrowers who took out these deals in earlier decades did not have a solid plan in place to repay that final amount. Following stricter rules introduced by the Financial Conduct Authority (FCA) after the endowment mis-selling scandal, lenders now require a credible repayment strategy. If yours has fallen short, or you simply never had one, finding that money can feel overwhelming.
The important thing to know is that you have options. If you’re unsure your current repayment plan is sufficient, speak to an equity release adviser.
Can interest-only equity release be used to pay off a mortgage?
Yes, equity release can be used to repay an interest-only mortgage. Here’s how it works:
There are several different types of equity release to choose from. The most common form is a lifetime mortgage. This allows you to release a lump sum of tax-free cash from the value of your home, which you can then use to clear your outstanding mortgage balance.
With a lifetime mortgage:
- You retain full ownership of your home and the right to live there.
- There are no mandatory monthly repayments (although some plans offer the option to make them).
- The loan, along with any interest that has built up, is repaid when your home is sold, typically when you pass away or move into long-term care.
Equity release is designed to help UK homeowners aged 55 or over access the wealth tied up in their home without having to move. Equity release products such as lifetime mortgages are also protected by the Equity Release Council's No Negative Equity Guarantee. This means your estate won’t owe more than your property is worth when it is sold, even if house prices fall or interest has accumulated significantly over time.
Who is eligible for equity release?
Before exploring equity release further, it is worth understanding whether you would qualify. Here are the typical eligibility requirements:
- Age: Most equity release products require you to be aged 55 or over.
- Property ownership: You must own your home in the UK.
- Property value: Your home must meet the lender's minimum property value threshold.
- Main residence: The property you want to take equity release on must be your primary home, not a second property or buy-to-let.
If you still have an outstanding mortgage, as is the case with an interest-only mortgage, you may still be eligible for equity release. The remaining balance would simply be repaid using the cash released.
The amount you can release generally depends on your age and the value of your property. Older applicants and higher-value properties typically allow a larger release. Eligibility criteria can vary between lenders and products, so it is always worth checking directly.
You can also find out how much equity you could release from your home using our free equity release calculator.
What are the pros and considerations of using equity release to pay off an interest only mortgage?
Equity release can be a genuinely useful solution for many UK homeowners. But it is important to go in with a clear picture of both the benefits and the risks.
Pros of equity release
The benefits of accessing cash through equity release include:
- You can clear your interest-only mortgage without having to sell your home.
- The cash released is generally tax-free.
- No mandatory monthly repayments on a standard lifetime mortgage, which can ease financial pressure in retirement.
- You can stay in your home for life.
- The Equity Release Council's No Negative Equity Guarantee means your estate won’t owe more than your property is worth when it is sold.
- Some plans offer optional repayment features, giving you more control over the loan balance.
Things to consider
Like many financial products, there are some important considerations with equity release, such as:
- Interest rolls up over time on a standard lifetime mortgage. This is known as ‘compound interest’ which can significantly increase the total amount owed.
- Equity release reduces the value of your estate, which may affect any inheritance you wish to leave.
- Early repayment charges may apply if you decide to repay the plan early.
- It could affect your entitlement to means-tested state benefits.
- Equity release is a long-term commitment and can be difficult to reverse.
These factors are real and worth taking seriously. Speaking to a qualified financial adviser before making any decision is strongly recommended.
Need help with equity release?
Releasing equity from your home isn’t an easy decision. For a free and impartial chat, speak to one of our friendly advisers.
You can also order a free equity release brochure.
What are the alternatives to using equity release to pay off an interest only mortgage?
Equity release is not the only way to deal with an interest-only mortgage shortfall. Here are some other options worth considering:
Downsizing
Selling your current home and downsizing to a smaller, less expensive property can release cash to repay your mortgage and may leave money to spare. It is one of the most straightforward routes for those who are open to moving.
Move to a repayment mortgage
Some lenders may allow you to switch from an interest-only deal to a repayment mortgage. Your monthly payments would be higher, but the debt would reduce over time. This depends on your age and income.
Retirement interest-only (RIO) mortgage
A RIO mortgage works similarly to a standard interest-only mortgage, but with no fixed end date. You make monthly interest payments, and the capital is repaid when you sell your home, move into long-term care or pass away. It can be a helpful middle ground for those who want to keep making regular payments without the pressure of a repayment deadline.
Using savings or investments
If you have ISAs, a pension lump sum, stocks and shares, other investments or savings set aside, these could be used to repay the mortgage capital.
Selling other assets
If you own additional property or other valuable assets, selling them could provide the funds you need.
Each of these options comes with its own eligibility requirements, costs and implications. A financial adviser can help you compare them properly and find the right fit for your situation.
Is interest only equity release right for me?
Equity release can be a good solution for UK homeowners aged 55 and over who want to clear their interest-only mortgage and stay in their home. It tends to work best when you have significant equity built up and are not solely focused on leaving a large inheritance.
That said, it is not the right answer for everyone, and the best option really does depend on your personal circumstances, your health, your property's value and your wider retirement plans.
Because equity release is a significant, long-term commitment, it is important to speak to a qualified financial adviser who specialises in later-life lending before making any commitment.
What are the benefits of using equity release to pay off an interest only mortgage?
Using equity release to pay off an interest-only mortgage is a genuine and realistic option for many UK homeowners aged 55 and over. It can allow you to clear your mortgage debt, stay in your home and move forward with your retirement without the stress of finding another repayment solution.
However, it is a big decision, and it is not right for everyone. The alternatives, from downsizing to a retirement interest-only mortgage, are worth exploring too.
Whatever route you are considering, the most important step is to get advice from a qualified financial adviser who understands your full financial picture. At LV=, we are here to help you understand your options and make the most of the home you have worked hard for.
Considering interest only equity release? Talk to the experts at LV=
Find out more about interest only equity release and explore your options by speaking to our equity release advisers. Request a call back today and take the first step towards a more comfortable retirement without leaving the home you love.
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