In the 1990s there was a significant increase in the availability and demand for Interest Only Mortgages. As an interest only mortgage is cheaper than an equivalent repayment mortgage it meant that for many, if they took an interest only mortgage, they were able to buy a more expensive property that they could have afforded using a repayment mortgage. While this was good at the outset, for many it came at the cost of them being able to save for the time when the mortgage needed to be repaid. Many people who have an interest only mortgage are coming to the end of their term and need to find some way of repaying the mortgage. Again, their age may prevent them from switching to a repayment mortgage and / or getting a term that makes this an affordable option.

Ultimately, they may have to sell their property and move to a smaller property – assuming they are left with enough money after the interest only mortgage has been repaid. Perhaps most importantly many customers are happy in their homes and don’t want to move. They therefore need to find a solution to this problem.

WARNING : While Equity Release is a potential solution to this problem, it should be considered as the option of last resort. There may be other solutions available to you that will provide a better outcome for you and your family. Our Equity Release advisers will consider all of your options and recommend the one they consider is in your best interests, which means they many not recommend Equity Release.    

It is important to understand that Equity Release is another form of mortgage 2 , but with the major difference that neither you, or anybody else named on the mortgage, has to make any payments to the Equity Release provider for your entire life, or until the last person living in the house is taken into long term care. In effect you are swapping one type of mortgage for another with the main difference being that you can live in the home for the rest of your life without needing to make any payments whatsoever.  

Using Equity Release to repay a mortgage

Equity is the difference between the value of the property less any debts secured against it, which in this case is an interest only mortgage. Therefore, someone with a property valued at £350,000 who has a mortgage debt of £100,000 is said to have equity of £250,000 (£350,000 less £100,000).

While this equity has a value to you and your family, for many, equity is not realisable money as the only way it can be accessed is either by selling the property or taking out a loan against it – a mortgage. As previously discussed, most people may not want to sell their home and taking a further mortgage may not be a realistic option.

If you are at the stage where you need to repay your interest only mortgage and don’t have any savings to repay the debt, and you are unable to take a further standard mortgage, then Equity Release may be the only option to allow you to stay in your home.

Some Simple Examples

The Equity Release plan set-up for Linda and Jim also provides them with the following benefits:

There are of course consequences of taking out an Equity Release loan the most significant of which is that the value of the original loan plus accumulated interest can be significant. In our example above, if Linda is the last to die at age 90, then the amount of the outstanding debt accumulated over 28 years would be £495,994 . While it is hoped that the value of the property would have also increased during this time, it could nevertheless be the case that when you die your children or family may have no other option other than to sell the house to repay the debt. Equally any inheritance they were due to receive will be significantly reduced. It is therefore important that you discuss Equity Release with your family BEFORE you take out any Equity Release loan. While it is possible to repay an Equity Release loan in your lifetime, for most it is highly unlikely they will do so. This is why we call it the option of last resort.

You can get a good idea of how much you can borrow, the set-up costs and how much the final debt could be by using our instant equity release calculator.

Questions and Tips

Do I need financial advice to take out an Equity Release loan ?

What Guarantees are there ?

They key guarantees are :

What does ‘rolled up’ interest mean ?

We can best explain this by means of a simple example. If a customer were to release £100,000 from their property and used an Equity Release product that had an annual interest rate of 5%, then at the end of the first year they would owe £5,000 in interest. However, they are making no payments whatsoever during their lifetime so the interest of £5,000 is added to the loan making the debt £105,000. At the end of the second year the 5% interest is payable on the new debt amount of £105,000 meaning that the interest for this year is £5,250, which again is added to the debt of £105,000. This now makes the outstanding balance £110,250. This process continues until the equity release loan is repaid. This process of adding outstanding interest to the original loan amount is called rolling up.

The table below uses the example of a 60 year-old releasing £100,000 from thier property at an assumed annual interest rate of 5%/ As discussed above it demonstrates how the ever-growing interest amount increases the overall value of the debt overtime. If you prefer you can use our instant equity release calculator and get an immediate personalised example to print out.

This chart is for information and example purposes only. The figures cannot be guaranteed. The actual interest rate applicable to your equity release loan may be higher or lower than 5%. Equally the chart assumes no associated costs or fees are added to the loan. The figures have been rounded up and down to the nearest pound.

I am much older than my partner, who is not yet old enough to take out Equity Release. We want to repay our interest only mortgage can I take Equity Release in my name only ?

Yes you can, but we think it would be a dreadful mistake. In this case when you die the debt would become immediately repayable. This could leave your partner homeless if they could not afford to repay the debt - a very likely outcome!

These are only a few simple questions. If you have a specific one, please feel free to contact us. We will answer it without obligation. You can also produce and print as many indicative equity release quotes as you want directly from this website.

Home Reversion

We would also like to point out that there is an alternative Equity Release option called Home Reversion. In this case all or part of your property is immediately sold but the house reverts back to you to live in for the rest of your life. We have not discussed this option in this article as for many good reasons these contracts are not so popular. However, if your Equity Release Adviser feels a Home Reversion Plan is in your best interests they will recommend one.