Interest-only mortgages and equity release mortgages (also known as lifetime mortgages) were once distinct products. Today, the two mortgage varieties are increasingly similar, sharing characteristics and regularly overlapping with each other. Let us unpick the differences to give you a clearer picture of the mortgage marketplace…
One of the biggest similarities between these two mortgage products is the fact that they both allow you to postpone payment of a large lump sum until a later date when payment is possible.
With interest-only loans, mortgage users only repay the interest on their loan until the end of their term. When the term ends, they must repay the required loan as agreed at the outset. In the case of an equity release mortgage, both interest and the capital repayment can be postponed indefinitely until the property is sold (typically when the customer passes away or moves into long-term care).
Although a wide range of people use interest-only mortgages, including landlords and other individuals with solid repayment vehicles, both interest-only and equity release mortgages are widely used by older individuals, especially since many providers have begun to increase upper age limits on interest-only products.
Interest-only and equity release products are increasingly being used in tandem. This is because some people who took out an interest-only mortgage before regulations were tightened are starting to find themselves unable to repay their capital at the end of their term.
In order to fund the capital repayment, many are opting for equity release which provides them with a large lump sum, allowing to repay the capital to the original lender and effectively re-mortgaging their property with a lifetime mortgage.
Time is one of the most important differences between an interest-only mortgage and equity release. While interest-only allows you to choose a time frame from two to typically a maximum of 25 years (depending on your preferences and age), equity release can last for an indefinite period (depending on how long you live or when your property is sold).
With an interest-only mortgage, you will know the full, total cost up front (depending on interest rates over the term). With an equity release, you typically will not.
If you underestimate the time period you will be using equity release, you could find the costs escalating beyond what you initially anticipated thanks to accumulating interest. If you plan to leave an inheritance or think you may need to access additional funds from the property in future, this may be the wrong choice of product for you. There are however many practices in place in relation to age at time of application to restrict this.
Get to grips with the mortgage options available to you, then find the perfect fit and the best deal. Discuss interest-only mortgages and equity release options with our knowledgeable brokers today on 0800 114 3978.