If you are a homeowner without sufficient savings to pay off an interest-only mortgage, you may want to consider equity release as an option. In this blog I’ll be explaining what an interest-only mortgage is, what the options are when your interest-only mortgage comes to the end of its term, and the benefits of using equity release to pay off an interest-only mortgage.
What is an interest-only mortgage?
An interest-only mortgage is when you only repay the interest on the loan each month, not any of the actual capital borrowed. It means that you are expected to repay the original capital borrowed at the end of the term. Many people opt for an interest-only repayment mortgage to make mortgage repayments more affordable, but don’t plan ahead and save to repay the loan.
Nowadays it is more difficult to get an interest-only mortgage, but ahead of the 2008 financial crisis, many customers were able to borrow on an interest-only basis without any proof of how they would repay the capital loan.
According to the Financial Conduct Authority (FCA), nearly 1 in 5 mortgage customers have an interest-only mortgage. In fact, nearly a million people in the UK have interest-only mortgages without any plan on how to repay the capital.
What happens when your interest-only mortgage comes to the end of its term?
When an interest-only mortgage comes to the end of its term, the capital needs to be repaid. This can be achieved with savings, by selling up, downsizing, extending your mortgage with your existing lender, remortgaging with a different lender, or repaying the capital with an equity release plan. Be aware that if you decide to repay in part, there may be a charge to do so.
Why consider equity release?
The main benefit of equity release and the reason many people turn to these schemes as a means to repay an interest-only mortgage is that many equity release schemes do not require proof of income or affordability.
With the most common type of equity release (a lifetime mortgage), a loan is approved against the property and used to repay the existing interest-only mortgage. Find out more about how equity release works in our previous blog here.
What are the benefits of equity release?
Here are some of the benefits of using equity release to pay off an interest-only mortgage.
- You get to stay in your existing home
- Your outgoings will be reduced
- You’ll have no more worry about letters from your mortgage lender asking about repayment
- There is flexibility around repayments – you can make regular payments on a suitable plan if you wish, or make no payments at all and allow interest to roll-up
- Any money released from your home using equity release is tax free
- The no-negative equity guarantee (offered by all Equity Release Council approved schemes) means that any debt you create with equity release, plus added interest, will never be more than the value of your home when you die or go into long-term care.
Equity release isn’t suitable for everyone. If you would like to know more about equity release, call John Whyte on 01903 890 660 for an initial free discussion on suitability. You may also like to read our previous blog on 4 common questions about equity release here.