Is equity release the answer to your interest-only mortgage?

Do you have an interest-only mortgage and no way to repay the capital? An 'equity release' loan could allow you to stay in your home. We look at the pros and cons.

Do you have an interest-only mortgage approaching maturity that you can't afford to repay? The answer, strangely enough, could be to take out another mortgage.

Hundreds of thousands of borrowers who took out interest-only mortgages two decades or so ago are approaching the time when they need to repay the loan – and the vast majority are thought not to have set aside enough money for the purpose.

Some will have taken out an endowment savings plan at the time, but many of these investments have not performed well enough to produce the sum needed to pay off the mortgage. Some borrowers have already cashed in their endowment and spent the money on other things. 

So what are your options if you have a mortgage that you need to pay off and no money to do it?

One is to sell the property and use some of the proceeds to pay off the mortgage. House prices have risen so much over the past 25 years that you are likely to have plenty of money left over, which you could use to buy a smaller property.

However, many people are attached to their homes, or don't want the upheaval of moving. People in this position often have another way of using the value that has built up in their property: borrowing against it and using the money raised to pay off their original mortgage. 

Naturally, the lender will charge interest. There are two ways to pay it: if you can afford to, you can pay monthly out of your income, which means that your outstanding loan remains the same; alternatively, the interest can be added to the loan – you stop making monthly repayments, and the rolled-up interest is paid, along with the capital, when the property is eventually sold. Either way, you get to stay in your home. 

Unfortunately, this solution, which is called equity release, won't work for everyone. It depends on your age, the amount of equity you have in your property and the amount outstanding on your interest-only mortgage. The older you are, and the greater your equity in relation to the mortgage, the better your chances. Let's look at a few examples to show when equity release will allow you to stay in your home – and when it won't. 
Writen 
By Richard Evans