How to repay an interest only mortgage
Repay An Interest Only Mortgage
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A method of repaying an Interest Only Mortgage

More than a quarter of the Equity Release loans in the UK are taken out for the purpose of paying off an Interest Only Mortgage 1. There are numerous reasons why so many people see Equity Release as an ideal way of repaying their Interest Only Mortgage and we will discuss most of them in this article – as well as highlight a few common mistakes.

If you would prefer us to explain in person you can contact us on 020 33 55 4837 or via our email address where one of our fully qualified Equity Release advisers will be happy to answer all of your questions without obligation. Equally you can click on one of our instant equity release quote buttons at any time to receive an indicative fully costed quote.

Equity Release - The Simple Stuff !

In this article we will explain :
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  A way of obtaining the value of your home without selling it
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  The value of your property (equity) repays the interst only mortgage
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  No payments are made for life
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  You can live in your home until you die or get taken into care
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  You are only liable to the value of your property even if the debt is more (those you leave behind will not face any further costs)

The Problem

Before the 1980s and 90s most people purchased their home using a repayment mortgage. Very simply each monthly payment paid the interest owing and a part of the amount borrowed. This meant that at the end of the term (typically 25 years) the full debt was repaid. An Interest Only Mortgage on the other hand only required the interest to be repaid during the term. The original amount borrowed needed to be repaid in full at the end of the term. 


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 UK Government publishes the average price of a house over time. In January 1995 the average price of a house in the UK was £55,437. Twenty-Five years later (the average term of a mortgage) by December 2019 the average house value had risen by 321.6% to £233,739. We can use this information to provide a simple illustration.
Couple Repay their Interest Only Mortgage
Linda and Jim purchased their home in January 1995 for £150,000. They had £30,000 as a deposit and took an interest only mortgage of £120,000 to make-up the balance. Their monthly mortgage payment is £250. Based on the UK price index by December 2019 the value of the property is now £632,400.
25 year Average House Price
Their mortgage term is due to expire in a few months’ time when they will need to give £120,000 to the mortgage company. They have no savings or any other realistic way of repaying this mortgage. As they are now both in their 60s and soon to retire, switching to a repayment mortgage is also not an option.

They love their home and have no intention of moving. They therefore look at Equity Release as an option. Equity Release will allow them to access a percentage of the value of their property. The amount they can release will depend on the age of the youngest person named on the Equity Release mortgage. Linda is the youngest aged 62, this means they could release £162,000.

They release £120,000 and repay their interest only mortgage. Their adviser ensures that their product has a number of built in guarantees (see below).
Equity Release Example box

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

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  They can live in their home until the last of them dies, or gets taken into long term care
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  The interest on the loan is ‘rolled up’ and added to the outstanding equity release amount
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  They will not have to repay the £120,000 and rolled up interest in their lifetime, unless taken into long term care
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  They will not have to make any monthly payments
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  If the value of the Equity Release debt were to increase to be more than the value of their home (negative equity) neither Linda, Jim nor their family will be responsible for this additional debt
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  If at a later date they want to move to an alternative home then the Equity Release loan will move with them, they do not need to repay it

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 ?

Yes – it is important that all other options are explored before an Equity Release Loan is taken out. The Regulator is concerned that people may take out Equity Release to repay an interest only mortgage without fully understanding it and the long-term consequences. Ultimately this will create a significant debt on your estate and have an impact on those you leave behind. Your Equity Release Adviser will be able to explore all your options with you. If you do end up using equity release then they will ensure it has the features you require and provide you with a number of guarantees. Most importantly they will help to ensure that mistakes that could have significant impacts are avoided.
To ensure that customers are fully protected the regulator (The Financial Conduct Authority [FCA]) has made it compulsory for all customers to receive advice from an adviser who holds specific Equity Release qualifications and also has permission from the FCA to advise on Equity Release. Our firm has both the required qualifications and permission. By clicking the ‘speak to an equity release adviser’ button opposite you will be directed to a secure form where you will be able to tell us what you require from Equity Release. One of our advisers can then have a no cost and no obligation conversation with you looking at all your options.
Repay 07 Mortgage 06 Only 05 Interest 04
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No Charge Speak to an Equity Release Adviser Now !! No Obligation Release 02
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What Guarantees are there ?

They key guarantees are :

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You can stay in your home for life or until the last survivor gets taken into long term care

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If the value of the Equity Release loan ends up being more than the value of the property your family will not pick up the bill for the excess amount

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If you want to move home at a later date your equity release loan can move with you which means that your purchasing power is not reduced

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An independent solicitor will asses the case before competition and confirm that you fully understand the product

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.


Balance owed
Interest at 5%
Debt at end of Year

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.

1. The Daily Telegraph Money - Autumn 2019 - Spring 2020
2. Our article discusses Equity Release as another type of mortgage. While for the majority of customers this is true, for some customers a home reversion plan may be the best option. This is an immediate sale of the property (or part of it) in exchange for a guarantee to live it for life.
Nothing in this article should be taken as personal advice and recommendation. UK tax rates and legislation are liable to change. Products, concepts, rates, legislation and rules referred to in the article above may not be current at the time you read the article.
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