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Interest-only equity release guide

Written By:
Myles Robinson - Expert Finance Advisor

Posted: Oct 24, 2022

Interest-only equity release – How do they work?

An equity release plan allows you to access the capital you have in your property. It is used to replace a traditional mortgage and provides you with a tax-free cash lump sum when required. There are many types of equity release plans, and you could also be entitled to an equity release mortgage if you have an existing mortgage.

This article will explain the details of interest-only lifetime mortgages so that you can decide whether equity release suits you. If this type of finance is unsuitable for you, we will discuss the drawbacks and possible alternatives.

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What’s an interest-only equity release?

A type of mortgage product that targets those over-55s is the interest-only equity release. This allows them to access their capital as a loan without capital repayments. An interest-only life mortgage is the most popular type of interest-only equity release.

A lifetime mortgage with interest only is a loan secured against your home. You could receive a tax-free cash lump sum depending on your income and property value.

The interest on the amount borrowed can be paid in whole or monthly interest payments. You can stop your loan balance from growing and protect the value of your estate when you die.

Equity release mortgages don’t usually require repayments. Instead, you can recoup the amount owed by selling your home or if you die.

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What does it mean?

If your application is successful, you can release a cash lump sum or have the same amount of tax-free cash paid in instalments.

You will then have to pay the monthly interest payments. Your loan amount will not change if you pay the monthly total interest charge.

Even if you pay only a small amount of interest each month, depending on your ability to afford it, you’ll find that your equity in the home is not being used up when you repay the loan. You may be able to repay part of the principal each year through some providers.

A surveyor will evaluate your property to determine the amount due. The loan proceeds are used to repay the loan.

What is the interest rate?

Every application outcome will be different depending on the lender and customer. Knowing a rough estimate of the interest rate you can expect for an interest-only equity release product is helpful. You may want to use an online equity release calculator for an estimate.

Some products are currently attracting rates as low as 3% when this article was written. Current interest rates are at 7%. Both rates are subject to significant change depending on market conditions when you apply.

Your lender will consider your financial capabilities when determining how much you can borrow. To calculate how much you can repay each month, your lender will consider your salary, benefits, pension, and savings.

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Eligibility criteria

Equity release caps and criteria are not usually different for interest-only equity releases than those where the borrower pays no monthly payments.

How your potential equity release provider evaluates your eligibility and your financial situation will determine how much you can get out of your home.

These are the things that the lender will consider when you apply:

  • The ratio of loan to value (LTV).
  • Life expectancy and age
  • Income
  • Property type
  • Location of Property
  • Credit history

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How a broker could help you to get the best interest-only deal

A broker can be valuable when applying for an interest-only equity transfer product. They will consider your financial and personal circumstances, make recommendations tailored to your needs, and find a lender to match you.

They may approve your application if they have an in-depth understanding of the interest-only products available and the requirements of specific lenders regarding eligibility criteria.

They can save you time and money by getting you the right product for your circumstances.

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Why choose interest-only equity release?

Interest-only equity releases allow you to use the funds however you like. This is a very attractive prospect. These funds can support retirement, give cash to your offspring, consolidate debts, and even pay down other debts.

These products offer other advantages over equity-release loans, such as home-reversion plans.

  • You retain full ownership of your house
  • You can keep your loan balance constant
  • You have the option to change to a lifetime mortgage
  • The interest rate remains the same throughout the term

Other considerations

You should carefully consider your options before taking equity out of your home. Your estate will be worth less if you take money from your home. There may also be inheritance tax implications. If your house’s value drops, this can lead to a lower sale price.

Also, you should carefully consider how this will affect your benefits. You could lose your entitlements or have your income reduced by the equity you release.

Alternatives products

You may consider other options after considering the drawbacks and consulting an expert advisor. These options may be better suited for you:

Rent-interest-only (RIO) mortgages

RIO mortgages have similarities to interest-only equity releases. Similarities are that equity granted to applicants must be repaid when the applicant dies or moves into a care facility.

One big difference is that applicants under 55 years old can apply. Applicants can pay the principal amount and make interest repayments.

Your home may be taken away if you fail to make interest payments. You should also remember that these interest rates are usually fixed for a limited time. Therefore, your repayments may increase in the future.

Lengthening your mortgage term

You can approach your lender to extend an interest-only mortgage term if you are nearing the end. This is if you have a difficult time repaying the remaining balance. The lender’s assessment of your situation will determine the eligibility of your application.


A remortgage may be available to you. If you are eligible, the interest rate you receive could be lower. You could access the money you need by releasing equity and making lower repayments.

Match with an equity release specialist

Any equity release product can be challenging to apply for, even those that are interest-only. Choosing the right product and lender for you can be difficult, given the many factors lenders consider and the sheer volume of lenders available.

Talking with a specialist is a great way to get the best advice. All of our brokers are regulated by the financial services register. We are experts in the market, and they will be able to identify the best product and lender for your needs.

This knowledge can increase your chances of a successful loan application. You can get the amount you want at a lower rate.

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A lifetime interest-only mortgage advantage:

  • The interest rate on lifetime mortgages is fixed for the entire term, unlike conventional mortgages.
  • If circumstances change, you can switch to a lifetime mortgage that does not require repayments. A higher interest rate may be applicable.
  • Some products let you preserve and retain some equity in your property if you are planning to leave an inheritance.
  • Some products allow you to add pre-approved flexible borrowing facilities to increase your future access to funds.

Lifetime mortgage with interest-only disadvantage:

  • Although releasing equity does not result in tax, the manner it is released could affect your tax situation and eligibility for means-tested benefits.
  • Future property prices could be higher or lower than today.
  • The value of your estate will be reduced if you release equity. This could impact the amount of inheritance that you may leave.
  • Securing other debts against your house has implications
  • Consolidating your debts over an extended period may result in you paying more overall


Is a lifetime interest-only mortgage repayable?

You can get the outstanding amount back from the property sale proceeds or after you move into long-term permanent care.

Can equity release cause negative equity?

All equity release plans that comply with the Equity Release Council standards have a ‘no equity’ guarantee. This guarantees that the amount owed cannot exceed the property’s value.

What amount of money can I borrow?

The amount that you can release depends on your age. The older you are, the more cash you can release.

Many providers will release a certain percentage depending on your age. A 60-year-old could release 20%, while a 65-year-old could release 25%. Many providers offer different amounts.

The amount of money you can borrow will depend on your property’s value, age and, sometimes, your health.

The new mortgage rules stipulate that interest-only lifetime mortgage applications will now be evaluated based on your ability to repay the loan.

Can I still leave an inheritance?

The difference between the proceeds of the sale of your house and the remaining balance on the plan at the time of redemption will determine the inheritance amount.

You can be certain of your future liabilities if your plan has a fixed interest rate for life.

We cannot predict your property’s future value and potential inheritance once sold.

How much does it cost to set up a plan?

Equity release comes with four high costs.

1. Advice fee

2. Valuation fee

This fee is due at the time you submit your application. It usually depends on your property’s estimated value.

3. Legal fees

After confirming your equity release offer, we recommend you negotiate a fixed fee agreement with your solicitor. The typical legal fees are between £400 to £500. Additional costs might apply if you are purchasing a property or if the legal situation of your property is complex.

4. Application fee

Some lenders may charge an application fee.

Is it possible to use equity release to repay an interest-only mortgage?

This is a viable solution, but you must have sufficient equity in your home to pay off your initial interest-only mortgage.

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