Can you use equity release to pay off interest-only mortgages?

Repaying an interest-only mortgage with equity release

Written in line with our editorial policy.

Equity release is one option if you are over 55 and looking for a way to pay off your interest-only mortgage. It means you’ll have no monthly payments to make, and you won’t need to sell your home to clear your current mortgage.

Are you one of the thousands of people close to the end of your interest-only mortgage? If you are, you may be worried about whether you have the necessary funds to pay off the loan capital.

You should consider all your options, but if none are available or suitable, equity release might be the answer. In this article, we’ll look at using equity release to pay off an interest-only mortgage including the pros and cons of this form of lending.

On this page:

• How does an interest-only mortgage work?
• Equity release to pay off your interest-only mortgage
• What are my other options for paying off my interest-only mortgage?
• Get advice on repaying your interest-only mortgage with equity release

Want to talk to an expert right away? To talk to one of our selected equity advisers, please call 0800 096 2215, or request a call back for a time that suits you. Your adviser can check your eligibility, discuss the suitability of equity release, and obtain quotes from leading providers to find the best plan for your needs.

All the advice and quotations at the latest equity release rates from our selected advisers are free and there is no obligation to proceed. You’ll only pay an advice fee if you choose to go ahead with a plan. You can typically pay this from the money you release from your home.

How does an interest-only mortgage work?

If you have an interest-only mortgage, you’ll already be familiar with how it works. Put simply, it’s a mortgage where you pay off just the interest each month, and then clear the loan capital at the end of the term. 

Unlike a more traditional repayment mortgage, you don’t repay any of the loan capital itself each month. This means that your monthly payments are smaller. But on the flip side, you have to find some way of clearing the loan itself when the term ends.

When you take out an interest-only mortgage, your lender will typically ask you to set up some means of paying off the capital in the future. That could be an endowment, other forms of savings or investment, or some other repayment vehicle.

Unfortunately, some people who took out interest-only mortgages didn’t make sufficient plans to ensure they can clear the loan. Whether that’s because they were mis-sold an under-performing endowment policy or for another reason, they are now faced with the task of finding a solution.

In June of this year, UK Finance published data on the interest-only mortgage market. They say that 664,000 ‘pure’ interest-only mortgages were outstanding at the end of 2023. This is in addition to 200,000 ‘partial’ interest-only deals that were still outstanding. 

This means that thousands of homeowners are facing up to paying off their interest-only mortgage. And some of them will not have sufficient funds available to clear their mortgage.

Equity release to pay off your interest-only mortgage 

In an ideal world, your intended repayment vehicle will provide the funds you need to clear your mortgage. But if you are reaching the end of your mortgage term and can’t see a way to clear the outstanding balance, equity release is potentially a solution. 

Equity release is a way for over-55s to access some of the equity in their property without having to move or make monthly loan repayments. Instead, the money you borrow and any accrued interest is paid back via the sale of your home when you pass away or move into long-term care. 

Here is an example to illustrate how a lifetime mortgage (the most popular form of equity release) to pay off an interest-only mortgage might work:

• Mr and Mrs Matthews from East Anglia are both aged around 67 and are retired.
• They took out a £60,000 interest-only mortgage on a property they bought for £65,000 25 years ago.
• They have £40,000 available to them from the endowment policy they took out with their mortgage, leaving a £20,000 shortfall. They have no other significant savings, and their pension income is relatively small.
• After looking at alternatives, they take out a lifetime mortgage for £20,000 to clear the interest-only mortgage.
• They can now stay in their home, with no repayments to make. They know that the £20,000 lifetime mortgage plus accrued interest will be payable from the sale of the home when the second of them passes away or moves into long-term care.
• Their property is now worth around £250,000. They therefore anticipate that even after paying off the lifetime mortgage and interest, the sale of their home should leave some money for their loved ones as an inheritance. 

This is a simplified example: it is vital to get quotations from equity release providers personalised to your situation. You can get quotations from across leading providers and professional equity release advice from our selected equity release advisers.

Equity release is not without its potential disadvantages. It can be an expensive way to borrow money compared to some alternatives. Also, it typically reduces the value of your estate and the amount of inheritance you leave to beneficiaries. Our selected advisers will talk through your alternatives to help you decide if equity release is the right solution for you.

What are my other options for paying off my interest-only mortgage?

Equity release could be just the solution you are looking for to clear your interest-only mortgage without having to find ongoing monthly payments. But it isn’t for everyone, and you should certainly explore other options first.

There are several potential options that may work better for you than equity release, including the following:

Seek compensation for a mis-sold endowment. If you think you were mis-sold an endowment, complain to your adviser or provider. If that doesn’t work, complain to the Financial Ombudsman Service.

Talk to your lender. Your mortgage lender may be willing to help, for example by extending the mortgage term or turning all or part of your interest-only mortgage into a repayment mortgage.

Remortgage with another lender. If you find that your current lender is unable to help, you may be able to remortgage with another lender. 

Sell up and buy a cheaper property. You might be able to downsize. That means selling your home to clear the outstanding mortgage, with enough left over from the sale to buy somewhere else.

A retirement interest-only mortgage. Similar to equity release, a retirement interest-only mortgage (RIO) is for over-55s and the loan is repaid when the property is sold after death or moving into long-term care. The difference is that it is mandatory that you make monthly interest payments on the loan. Our selected advisers can discuss RIOs with you and look for available products, if that is of interest to you.

Get help from family or friends. Family or friends may be able to help you clear the mortgage, perhaps in anticipation of being named as beneficiaries in your will. But it’s best to seek professional advice as it’s usually not guaranteed that your home will be available to them as an inheritance in the future.

Use your pension. If you are over 55 (over 57 from April 2028) you may be able to access some or all of your pension pot as a lump sum to clear your interest-only mortgage. But we’d suggest that you consult a financial adviser beforehand as this may not be the best way to use your pension savings.

These are examples of how you might be able to repay your interest-only mortgage if equity release is not of interest to you. They all have their pros and cons, so we would suggest talking to a financial adviser for assistance. You can also talk to our selected equity release advisers for more information about how equity release might work for you.

Get advice on repaying your interest-only mortgage with equity release

If you would like to find out whether equity release is available to you as a way to clear your interest-only mortgage, we can help.

Please call 0800 096 2215, or request a call back for a time that suits you, and we will arrange a call with one of our selected advisers. Alternatively, you can use our free equity release calculator to see how much you could unlock. 

All the advice and quotations you receive (containing the latest equity release rates) will be given free of charge. You’ll only pay a fee for advice if you choose to go ahead with a plan, and you can typically pay this from the money you release from your home.

Sources:

664,000 ‘pure’ interest-only mortgages and 200,000 ‘partial’ interest-only deals outstanding at the end of 2023: interest-only mortgages. UK Finance. Accessed 03/09/2924

About Richard Groom. A writer with 20+ years’ experience across several sectors including financial services, Richard has a passion for writing clear and simple content on even the most complex of subjects. In his spare time, Richard loves exploring the hills and mountains of the UK on long walks with his faithful cocker spaniel. Follow Richard on LinkedIn