Can you take out equity release to pay off an interest-only mortgage?
Yes, equity release can be used to repay an interest-only mortgage, provided there’s enough equity in the home to repay it. Fortunately, for many homeowners who took out an interest-only mortgage in the 1990s, the previous two decades have seen a significant rise in house prices, which means that many should have built up enough equity to cover the full amount. In addition, as equity release does not require the loan to be paid back until the borrower moves into permanent care or dies, homeowners do not have to worry about monthly repayments.
What are the disadvantages?
Firstly, equity release providers typically have lower valuations than estate agents’ valuations, and a low loan-to-value (LTV) may be the only option offered. Another big drawback is that interest is added to the amount borrowed, which means when the loan needs to be repaid, it not only factors in the initial amount borrowed but also the interest accumulated over the years, which can often be a significant amount (though thanks to negative equity guarantees, it will never be worth more than the property’s value). As a result, equity release can mean the borrower leaves behind very little inheritance from their property.
Saying this, interest rates on equity release have fallen in recent years, and the range of products available has grown significantly. But there are several other options available to those looking to repay an interest-only mortgage, such as the proceeds of careful investments or downsizing to a smaller property. Or, a retirement interest-only mortgage could be a solution: this enables homeowners to continue making interest-only repayments on their mortgage, with the loan repaid when the house is eventually sold. Ultimately, any of these solutions could have a long-term financial impact, and speaking to an independent financial adviser is essential before committing.
There’s a lot more to this story online, or if you’re considering equity release, make sure to speak to a broker first.