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

*Updated February 2024*

Yes, equity release can be used to pay off your interest only mortgage, and could be a good option if you'd like to carry living in your home. If not, you should first consider downsizing, as this could be more cost effective long term.

Interest only mortgages were a popular and affordable way to buy a home, before the 2008 financial crash.

What happens at the end of an interest only mortgage?

As the name suggests, with an interest only mortgage, the amount you pay each month is the interest on the loan itself. At the end of the mortgage term you will need to pay off the full amount owed.

What if I can't pay off my interest only mortgage?

Unfortunately for many interest only mortgage holders 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.

Instead of the hoped for 'mortgage free' future some people are instead unable to repay their mortgage and could risk losing their home.

According to the Financial Conduct Authority, 40,000 over 65s will come to the end of their interest only mortgage each year until 2032.

However, for homeowners over 55 with enough equity in their home, equity release could be one way to repay their interest only mortgage.

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.

 

A note from our expert, Ashley:

If you/re thinking about using equity release to pay off your interest only mortgage, bear in mind that doing so will reduce the value of your estate and could affect your entitlement to means-tested benefits. 

This is why you must take financial advice before reaching a decision. To get the whole picture, speak to a qualified, independent adviser who can help you weigh up all the options available to you including equity release.

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.

Next steps

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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