Interest Only Mortgages

These schemes work by giving you a lump sum, secured against the value of your home.  Regular interest payments are made by you for the rest of your life, usually monthly.  The capital element of the loan is then repaid out of the proceeds from the sale of your home when you die.

With these schemes, your eligibility is often dependent on your income not other factors such as your age, as with some other equity release schemes.

Advantages of Interest Only Mortgages

By paying the interest element of the loan, the capital amount repayable from the sale proceeds of your home stays the same.  Your next of kin will therefore benefit from increases in the value of your home during your lifetime.

Amounts available to younger customers may be higher than for lifetime mortgages, since they are not affected by age.

You may be able to lock in a fixed interest rate, thus locking in a fixed repayment amount.
Set up fees can be considerably lower than other equity release schemes.

May be used as a temporary measure for younger customers, while they wait to become eligible for other equity release schemes.

Disadvantages of Interest Only Mortgages

You will need to continue making interest payments for the rest of your life.  You should therefore consider whether you will be able to meet this commitment.  Failure to keep up with repayments may result in your home being repossessed.

You may not have the option of a fixed interest rate, and therefore your monthly interest repayments may fluctuate and rise above your pension or other income.  As a result, you may not be able to meet your ongoing commitments.

Because interest payments are required for the rest of your life, it may affect your standard of living in later life when the lump sum runs out.

You may be required to purchase an annuity using the lump sum, to ensure you can meet the interest payments required.  Annuities only offer high rates to elderly homeowners, making such schemes more suited to more elderly homeowners.

If you were to move home, the loan amount would have to be repaid, in which case you may not have sufficient equity to buy a new home.

Should you want the loan to continue beyond retirement, the lender may wish to limit the amount to a multiple of your income, which may not be sufficient for your needs.

Mortgage may initially be based on a joint income, making monthly payments difficult following the death of one of the couple.