Should You Get an Interest-Only Equity Release?

Equity release is becoming an increasingly popular financial option, especially among those over 55. 

If you fall into this age group, you might be considering this to free up some capital from your property. Specifically, the interest-only equity release might catch your eye, as it offers unique features.

In this complete guide, you’ll find clear insights, straightforward explanations, and helpful advice on interest-only equity release, eligibility, and how it could align with your specific needs. 

What is Interest-Only Equity Release?

Interest-only equity release is a specialised loan for those over 55.

With this, you can unlock the value of your home, paying only the interest monthly if you wish, to keep the loan balance steady.

An interest-only equity release doesn’t require capital repayments. This means you’re not chipping away at the borrowed amount, just the interest.

The most appealing version of this is the interest-only lifetime mortgage. You can borrow against your home’s value while retaining ownership.

The amount you can borrow depends on factors like your home’s worth, your age, and your income.

Unlike ordinary equity release mortgages, which don’t require monthly payments, the interest-only options offer flexibility.

You can choose to pay part or all of the monthly interest, controlling your loan balance and thereby protecting your estate’s future value.

When it’s time to settle the loan—perhaps when moving into long-term care or passing away—selling your home typically covers the debt.

How Does Interest-Only Equity Release Work?

Here’s the step-by-step guide about how interest-only equity release work:

• Assessment and Approval. You apply for the equity release, and the lender checks your property’s value, age, and income. If approved, you find out how much you can release based on this assessment.
• Receiving the Funds. You decide whether to receive a lump sum or regular instalments, and the lender releases the funds accordingly. You can spend the money as you see fit.
• Paying the Interest. Interest accrues on your loan each month, and you have the option to pay it all or partially. By doing so, you maintain control over your debt, preventing the loan amount from growing. Some providers allow you to repay part of the principal each year, giving you greater control over the loan balance.
• End of Loan Process. The loan is repaid when you sell your home, pass away, or move into long-term care. An independent surveyor values your property; then, it is sold, and the proceeds are used to repay the loan. Any remaining funds are yours or go to your estate.

To get a clear picture, here’s an example of how it works:

Suppose you own a property worth £300,000, and you’re approved to release £50,000 through an interest-only equity release. You opt for a lump sum and receive £50,000 from the lender. 

If the interest rate is 5%, your monthly interest would be £208.33. You decide to pay the interest in full each month, so your loan amount stays the same.

A few years later, you choose to sell your home or the loan term ends. An independent surveyor values your property, and it’s sold for its market value.

The £50,000 loan amount plus any unpaid interest is repaid from the sale proceeds, and the remaining funds go to you or your estate.

Who is Eligible for Interest-Only Equity Release?

When considering interest-only equity release, you’ll want to know if you qualify. The criteria are generally similar to other equity release schemes. Here’s a breakdown of the common eligibility requirements:

• Age and Life Expectancy – Most plans require you to be over a certain age, often 55.
• Income – Some plans might need you to have a stable income.
• Property Details – The condition, type, and location of your property will be assessed.
• Credit History – Your credit history may also be considered as part of the application.
• Property Value – Most providers will only consider your application if it’s worth at least £70,000.

>> More about Equity Release

How Much Equity Can You Release?

The equity release calculator is a handy tool that you can use to get an estimate of how much you might be able to release from your property. It’s a simple way to figure out what’s possible without committing to anything just yet.

To get an estimate of what might be available to you, take a moment to input a few details in our equity release calculator.

How a Professional Broker Makes All the Difference

A professional broker is like a helping hand when you’re looking into interest-only equity release. They know the ins and outs of the market and have the expertise to match you with the right deal. 

They’ll take the time to understand your needs and find a plan that fits you like a glove. In a sense, they do the hard work so you don’t have to.

It’s easy to find a broker who can assist you. Simply, fill out this quick form. And we’ll match you with an experienced advisor who understands your situation and can guide you toward the best interest-only equity release plan.

What Interest Rates Can You Expect?

TInterest rates for equity release plans usually sit between 5% and 9%, but they depend on a few key things. 

These rates can change over time, so it’s always a good idea to check with a professional who can give you the latest details that match your situation.

The rate you’re offered isn’t picked randomly—it’s based on factors like:

• Your age: Older borrowers often get better rates.
• The value of your property: More valuable homes might open up better options.
• How much you want to borrow: The amount you take out can affect the deal.
• The lender’s terms and conditions: Each company has its own rules.
• Your income and savings: Things like your salary, pension, or other savings might come into play.

Lenders use all this information to decide what rate suits you best and work out how much you might need to repay.

Since interest rates can vary, it’s a good idea to speak to an equity release expert. 

They can help you explore the options, find the most suitable plan, and make sure you fully understand all the costs involved.

>> More about Equity Release Rates

Should You Choose an Interest-Only Equity Release?

If you’re considering an interest-only equity release, it’s essential to weigh the pros and cons to determine if it’s the right choice for your financial situation. 

Here’s a straightforward breakdown to help you make an informed decision:

Pros:

• Paying interest monthly helps you control the amount you owe.
• The interest rate is fixed for the entire term, giving you stability.
• You can choose how to release the funds in a lump sum or regular instalments for greater financial control.
• The released funds can be used flexibly, like supporting retirement or helping family members with housing deposits.
• You’ll continue to own and live in your home, and you have the option to switch to another lifetime mortgage.

Cons:

• Monthly interest payments might be a burden with fluctuating income.
• Not keeping up with payments may lead to serious complications.
• Accessing equity might affect eligibility for certain benefits, and your total income could be reduced.
• It’s a long-term agreement and might not suit changing circumstances.
• Your estate’s value may decrease, affecting inheritance and possibly resulting in tax implications, especially if the house’s value drops.

Alternatives to Interest-Only Equity Release

Interest-only equity release may not be suitable for everyone. It’s important to explore other financial solutions that might be a better fit for your unique needs.

Here’s a quick look at some alternatives:

Retirement Interest-Only Mortgages

RIO mortgages are similar to interest-only equity releases with mandatory interest repayments and no lower age limit. Hence, you can still apply even if you’re under 55.

But, the interest rates on these products are often fixed only for a set period, meaning your repayments might increase in the future. 

This option needs careful consideration, as falling behind on repayments could lead to repossession of your home.

Remortgage

Remortgaging could provide access to the money you need by releasing equity with possibly cheaper repayments. 

This option might lead to a lower interest rate, but it’s essential to consider potential fees and current market conditions. 

Your eligibility for a remortgage will also depend on a variety of factors. So, having professional advice is beneficial to understand the full implications.

Lengthening Your Mortgage Term

If you are nearing the end of an interest-only mortgage term and struggle to repay the outstanding balance, you could approach your lender to extend it. 

This lowers monthly payments but results in more interest paid over time. Your application’s success will depend on your lender and how they view your situation, making this a potentially flexible but complex solution.

Downsizing

Moving to a smaller, less expensive property can release equity from your current home. This approach allows you to access funds without taking on additional debt. 

But, it requires moving, which can be disruptive and emotional, and may incur moving and transaction costs. The challenge is finding a suitable property that meets your needs and lifestyle.

The Bottom Line: Speak with an Equity Release Advisor

Interest-only equity release is a versatile and adaptable financial tool for those over 55, offering a unique way to unlock your property’s value while keeping control over the loan balance.

Whether it’s for supplementing retirement, assisting family, or fulfilling personal goals, it’s essential to understand the various aspects involved.

Selecting the ideal interest-only equity release plan might feel like solving a complex puzzle. With an array of options and factors to consider, aligning everything with your needs is essential. Here’s where a skilled broker shines.

With a thorough grasp of the market and a genuine interest in your aspirations, a broker zeroes in on the perfect solution, ensuring you’re not just satisfied but delighted.

It’s not about pushing a product; it’s about finding your perfect match.

Keen to discover your match? Fill out this form, and let’s connect you with a top mortgage broker ready to sculpt your ideal interest-only equity release plan.