Can I Pay Off an Interest-only Mortgage with Equity Release?
If you have taken out an interest-only mortgage, then you might be wondering ‘Can I pay off an interest-only mortgage with equity release?’
Luckily, the answer is that yes you can. In fact, thousands of people up and down the country are choosing to pay off their interest-only mortgage with an equity release loan.
Equity Release Explained
Equity release is a form of mortgage which allows homeowners over 55 years old to release equity from their home, completely tax free. You also get to remain living in your home, whilst being able to spend their money whichever way they want to.
You can either opt to receive your money in one large lump sum, or through a number of smaller and frequent payments.
You won’t be taxed on the money you receive, so the money you see on your completion contract will be the exact same amount you see going into your bank account.
If you are considering taking out equity release, then it’s important to know that there are two main types of equity release. The most popular form of equity release plan is a lifetime mortgage.
The other most popular type of equity release is called a home reversion plan. It is important to understand the key differences between these two types of equity release, which is discussed further below.
According to Money Saving Expert, Martin Lewis, individuals should always consider downsizing first before opting for equity release. However, for many people aged 55 or over moving simply isn’t an option that they want to entertain [1].
Please call our 24-Hour Helpline: 0330 058 1579
1. Lifetime mortgages
Lifetime mortgages are more popular than home reversion plans, because you remain the sole owner of your home with a lifetime mortgage. You are able to release a tax free amount of equity from your home, and get to stay living in your home.
Your lifetime mortgage does not need to be repaid until after you pass away or move into a care home, when your next of kin will then sell your house and use the money from the sale of the house to pay off the equity release loan.
However, you will be charged interest on your equity release lifetime mortgage. This interest will compound very quickly, and increase the loan amount significantly.
This is why most equity release plans and lenders allow people the chance to pay off some of the interest on their equity release loan whilst they are still alive, to avoid compound interest.
It is important to remember with lifetime mortgages that your loved ones will have to use their inheritance from the sale of your house to repay the loan. This means that the amount they are expecting to receive in inheritance might be reduced.
2. Home reversion plans
Home reversion plans are less popular than lifetime mortgages. When you opt for a home reversion plan, you have to sell a certain percentage of your home before you are able to receive your equity release funds.
You are able to remain living in your home until you pass away or move into a care home. When you do so, your next of kin will sell your house.
However, as you have already sold a percentage of the property to the equity release lender, your next of kin won’t receive as much money as they might have hoped for.
As you can see, opting for equity release might result in your next of kin receiving less inheritance, which is why it is important to speak to your next of kin(s) about taking out an equity release loan to make sure that they are on board and fully aware of the consequences of your decision.
Both equity release plans are offered alongside a no negative equity guarantee. This means that even if your house sells for less than you bought it for, your next of kin won’t be responsible for having to pay off the equity release loan if the proceeds of the sale doesn’t cover the loan amount. Your lender will be responsible for this, not your family.
If you are wondering ‘Can I pay off an interest-only mortgage with equity release?’ then speak to a member of the Equity Release Warehouse team for advice and support.
Please call our 24-Hour Helpline: 0330 058 1579
What is an interest-only mortgage?
An interest-only mortgage is a type of mortgage which allows people to reduce the size of their monthly mortgage repayments.
This is because instead of paying your normal mortgage repayments, which are a mixture of the loan amount and the interest, with an interest-only mortgage you only have to repay the interest on the loan each month [2].
Whilst this might seem like a right idea in the short term, it is important to understand that at the end of an interest-only mortgage, you still have to repay the loan capital. This means that you either have to repay the loan, or re-mortgage your house.
Before a lender can approve you for an interest-only mortgage, they will need hard evidence that you are going to be able to pay off the full loan amount by the time your mortgage ends.
They will need to see evidence of a repayment vehicle, which could be a form of invest or ISA with the funds in [2].
This is why if you are considering an interest-only mortgage then the money you save on your monthly mortgage repayments should be used in investments, to generate enough money to pay back the final loan amount.
If you generate enough money from your investments, you might be able to repay the final loan amount early, which would avoid you having to sell your house or re-mortgaging your house [2].
If you have taken out an interest-only mortgage and are wondering ‘Can I pay off an interest-only mortgage with equity release?’ then get in touch with our team at Equity Release Warehouse.
Please call our 24-Hour Helpline: 0330 058 1579
Can I pay off an interest-only mortgage with equity release?
If you have taken out an interest-only mortgage and are wondering ‘Can I pay off an interest-only mortgage with equity release? then you will be happy to hear that yes, equity release plans can be used to pay off an interest-only mortgage.
However, it is important to understand that you will only be able to do so if the value of your property covers the cost of the mortgage.
As house prices have risen over recent decades, this isn’t a problem for most people as it means that they should have more than enough equity in their home to cover the cost of the initial mortgage that they took out.
On top of this, when you opt for an equity release loan you do not have to repay the loan until after you pass away or move into a care facility, which means that you are able to pay off your interest-only mortgage with an equity release loan which you do not have to repay until after you pass away.
However, most equity release lenders will value your home for less than the current market value, especially if you are opting for a home reversion plan. However, this will depend on the location of your house, the current quality of your house and which lender you choose to go with.
You are only able to use your equity release loan to pay off your interest-only mortgage if you are aged between 55 years old and approximately 95 years old.
How much equity you are able to release from your home will depend on a number of factors, but usually ranges between 20% and 90% depending on your age and current circumstances.
If you do not want to repay anything until after you pass away, then you might choose to opt for a roll up equity release plan. However, it is important to understand that the interest on your loan will turn into compound interest if you do not pay it off as you go.
If you are considering paying off your interest-only mortgage with an equity release plan, then make sure you speak to a fully qualified equity release advisor first.
They will need to ensure that you are able to cover the cost of the mortgage with the cost of your equity release loan, which might not always be the case.
It is important to understand that you will have to continue to pay off the interest on your interest-only mortgage until your equity release application has been processed and you have received your funds.
Once you have received your funds and the equity release application process is complete, you are able to stop paying the monthly payments on your interest-only mortgage.
Can I pay off an interest-only mortgage with equity release? – The disadvantages
If you are wondering ‘Can I pay off an interest-only mortgage with equity release’ then it’s important to understand the disadvantages of doing so.
Unfortunately, there are one or two drawbacks to using equity release to pay off an interest-only mortgage. For starters, whilst you might stop having to pay the interest on your interest-only mortgage, you will be charged interest on your equity release loan.
Whilst you are able to leave this interest and allow it to compound, your next of kin will end up having to repay it using the sale of your property.
You can, however, choose to repay the interest on your equity release loan whilst you are still alive in order to avoid the compound interest that will build up if you simply ignore it.
However, if you choose to do this you are only replacing your monthly interest-only mortgage repayments with your equity release interest repayments.
If you are questioning ‘Can I pay off an interest-only mortgage with equity release? but are unsure whether it is the right thing to do, then speak to one of our specialists at Equity Release Warehouse.
Please call our 24-Hour Helpline: 0330 058 1579
How else can you repay an interest-only mortgage?
If you have an interest-only mortgage to repay and equity release is not for you, then there are a number of other ways you can pay it off.
When you initially take out an interest-only mortgage, your lender will want to know exactly how you plan on paying off the final payment, and will often ask for proof that you are able to do so before they offer you your mortgage [3].
1. Retirement interest-only mortgages
If you have not managed to save as much as you would have hoped, or your investments didn’t bring in as much money as you once thought they would, then you might opt for a retirement interest-only mortgage.
Retirement interest-only mortgages are not enough to pay off your interest-only mortgages, but will allow you to stay living in your home whilst you carry on paying off your interest-only mortgage.
You will only have to repay a retirement interest-only mortgage after you pass away or move into a care home.
2. Moving home
If you are open to the idea of moving house, then you might want to consider selling your home to help pay off your interest-only mortgage. However, your house must have increased in value for you to do this comfortably.
3. Switching to a repayment mortgage
If you think you are unable to pay off your interest-only mortgage by the time it comes to an end, then you will need to tell your lender as soon as possible. They might suggest that they put you on a payment mortgage, or extend the length of your mortgage so that you have more time to pay off the interest and capital.
4. Sell other assets
If you are struggling to pay off your interest-only mortgage then there might be other assets you are able to pay off in order to pay off your mortgage. You might be able to sell other properties or a car to make the payment.
5. Selling up
If you don’t think that you are going to be able to repay your interest-only mortgage then you might want to consider downsizing. By doing so, you will be freeing up a significant amount of cash to help pay off your interest-only mortgage.
Please call our 24-Hour Helpline: 0330 058 1579
What are the main differences between a lifetime mortgage and an interest-only mortgage?
If you are wondering ‘Can I pay off an interest-only mortgage with equity release?’ but are confused about the differences between lifetime mortgages and interest-only mortgages then you will need to learn their distinguishing features to avoid getting confused.
The main difference between an interest-only mortgage and a lifetime mortgage is that with a lifetime mortgage you are able to release the equity in your home, without having to make any monthly repayments. Whereas with an interest-only mortgage you have to repay the interest on your mortgage.
With a lifetime mortgage, the amount you are able to release from your home will depend heavily on your age. However, an interest-only mortgage does not take your age into account.
In addition to this, whilst lifetime mortgages benefit from no negative equity guarantees, interest-only mortgages do not. This means that with an interest-only mortgage, if your house sells for less than the loan amount then you and your family will be liable to pay the difference.
With a lifetime mortgage, there are no monthly repayments and you are able to remain living in your home for as long as you want to. However, with an interest-only mortgage you have to keep up the payments in order to remain living in your home.
If you are wondering ‘Can I pay off an interest-only mortgage with equity release? but are getting confused on the differences between lifetime mortgages and interest-only mortgages, then speak to the Equity Release Warehouse team for advice.
What if I am unable to pay off my interest-only mortgage?
If you are currently struggling to pay off your interest-only mortgage and are worried about your future, then it is important to understand that you are not alone.
Unfortunately, not everyone who takes out an interest-only mortgage has a way of paying it off. If this is the case, then you should try to speak with a financial adviser to assess your options.
They will be able to create a repayment strategy for you by suggesting other ways you might be able to repay your interest-only mortgage.
If you will struggle to pay off your interest-only mortgage, you should be asking yourself ‘Can I pay off an interest-only mortgage with equity release?’ as this could be your solution.
Please call our 24-Hour Helpline: 0330 058 1579
Is there an age limit when it comes to repaying my interest-only mortgage with an equity release loan?
When it comes to repaying any type of loan and mortgage, every lender is different. Whilst some lenders might enable you to pay off an interest-only mortgage until you reach old age, others might set some limits when it comes to paying back your mortgage and your age.
Some lenders ask you to repay the interest-only mortgage by the time you hit 65 years old, whereas another lender might allow you to continue your mortgage until you are 75 or over. It all depends on your lender and what is written in your contract.
It is always important to check the terms and conditions of your loan before you agree to take out an interest-only mortgage. This is particularly important to do if you or someone you are applying with, like a spouse is older than the other.
Speak to Equity Release Warehouse
If you are wondering ‘Can I pay off an interest-only mortgage with equity release?’ As you will have read on this page, you are able to use your equity release loan to pay off your interest-only mortgage as long as you qualify.
If you would like more help in applying for an equity release loan, then speak to the team at Equity Release Warehouse for help and support.
References
[1] https://www.moneysavingexpert.com/mortgages/equity-release/
[2] https://www.moneysupermarket.com/mortgages/interest-only-mortgage/
