Can you use equity release to pay off your interest only mortgage?
Equity release can be used to pay off your mortgage so you can move on with your life with one less thing to worry about.
According to the Financial Conduct Authority, 40,000 over 65s will come to the end of their interest only mortgage each year until 2032.
Why so many? Until the 2008 financial crash, interest only mortgages were a popular choice, providing an affordable way to buy a home. This is because the monthly repayments only cover the interest not the capital, which isn’t repaid until the end of the mortgage term. To meet this final payment, you need to have some form of finance in place that should ultimately be worth enough to clear it.
Unfortunately, it hasn’t worked out this way for all interest only mortgage holders. For many, the reality is that the endowment policy, savings or investment they had earmarked to repay their mortgage has fallen short, and in some cases considerably.
Why use equity release to pay off your interest only mortgage?
As house prices have risen consistently over recent decades, so too has the amount of equity tied up in our homes. Equity release offers homeowners aged 55 or over a way to access that cash and use it pay off their interest only mortgage, without having to sell up and move out.
The most popular type of equity release is a lifetime mortgage, which is a loan secured on your home, just like your existing mortgage. The difference is you take the loan as tax free cash and you don’t have to make any monthly repayments, so there’s no risk of being repossessed. Instead, the money you’ve borrowed, plus all the compound interest, is repaid when you die or move permanently into long term care.
Whether you can pay off your interest only mortgage using equity release will depend on how much equity you have in your home and how much of it you can borrow, which will depend on your personal circumstances.
For more information, read our guide to lifetime mortgages.
Bear in mind that equity release will reduce the value of your estate and could affect your entitlement to means-tested benefits. It may not be the suitable for you, so you must seek professional advice from a qualified adviser before making any decisions.
Other ways to pay off an interest only mortgage
There are several alternatives to equity release you could use to pay off an interest only mortgage, most of which will depend on your age and financial situation:
- Extend your mortgage – this could give you more time to save and repay the loan, although this will depend on your age and income. Most lenders will have an age limit.
- Switch to a repayment mortgage – this could allow you to repay the interest and some of the capital each month, until the mortgage is paid off. However, your monthly repayments will be higher.
- Make larger monthly repayments – this could reduce how much you have to pay back at the end of your mortgage term. Your mortgage lender can advise you on the overpayment options they offer.
- Switch to a lower interest rate with your existing lender or a new one - this will reduce your monthly payments so you can use the money you save to overpay and reduce how much you will have to pay back at the end of your mortgage term.
- Get a retirement interest only mortgage – this could remove the time pressure. It will need to be repaid in the same way as your interest only mortgage, but there’s no set date for the capital to be repaid. Instead, you continue making monthly repayments for life or until you move into care, when the property is sold and the capital repaid.
- Downsize to a cheaper property – this could generate enough money to repay the capital, depending on the difference in value between your current home and the new property.
To help you make a more informed choice, the Financial Conduct Authority has a helpful guide to repaying interest only mortgages and we have looked into the pros and cons of equity release in more detail.
If you’re looking for a way to pay off your interest only mortgage and are considering equity release use our free and easy-to-use calculator to see how much you could get.
Or call the UK’s leading equity release specialist, Age Partnership on 0800 368 8466 for a free initial consultation to discuss your options in more detail.
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