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Interest Only Home Equity Loan – Complete Overview

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Scott Nelson

Managing Director

MoneyNerd’s founder, Scott Nelson, has a decade of financial industry experience, including 6 years in FCA regulated loan and credit card companies. Troubled by a lack of conscience in the industry, he founded MoneyNerd to give genuine advice to those in debt and struggling financially.

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Janine
Janine Marsh Profile Picture

Janine Marsh

Financial Expert

Janine Marsh is an award-winning presenter and a valuable member of the MoneyNerd team. With a wealth of experience as a financial expert, she's been featured on BBC Radio 4, BBC Local Radio, and BBC Five Live, and is a regular on Co-op Radio.

Learn more about Janine
· Jan 15th, 2024
Looking for a loan? £5,000 to £2.5 million available, compare deals below.
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Search powered by our partners at LoansWarehouse. Representative example: If you borrow £34,000 over 15 years at a rate of 8.26% variable, you will pay 180 instalments of £370.70 per month and a total amount payable of £66,726.00. This includes the net loan, interest of £28,531.00, a broker fee of £3,400 and a lender fee of £795. The overall cost for comparison is 10.8% APRC variable. Typical 10.8% APRC variable

Representative example: If you borrow £34,000 over 15 years at a rate of 8.26% variable, you will pay 180 instalments of £370.70 per month and a total amount payable of £66,726.00. This includes the net loan, interest of £28,531.00, a broker fee of £3,400 and a lender fee of £795. The overall cost for comparison is 10.8% APRC variable. Typical 10.8% APRC variable

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Home Equity Loan Interest-only

Representative example: If you borrow £34,000 over 15 years at a rate of 8.26% variable, you will pay 180 instalments of £370.70 per month and a total amount payable of £66,726.00. This includes the net loan, interest of £28,531.00, a broker fee of £3,400 and a lender fee of £795. The overall cost for comparison is 10.8% APRC variable. Typical 10.8% APRC variable

Are you interested in an interest-only home equity loan? These types of loans can be a useful way to borrow money using the value of your home. However, it’s important to understand what they are and how they work.

In this article, we’ll explain:

  •  How an interest-only home equity loan works
  •  The real cost of a poorly chosen home equity loan
  •  The difference between home equity loans and home equity lines of credit
  •  Whether you will pay interest on a home equity loan
  •  The pros and cons of an interest-only home equity loan

We know that this topic can be confusing. That’s why over 6,900 people visit our website each month looking for guidance on these types of loans.

We’re here to answer all your questions and help you make the best choice for your situation.

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How long for?

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Representative example: If you borrow £34,000 over 15 years at a rate of 8.26% variable, you will pay 180 instalments of £370.70 per month and a total amount payable of £66,726.00. This includes the net loan, interest of £28,531.00, a broker fee of £3,400 and a lender fee of £795. The overall cost for comparison is 10.8% APRC variable. Typical 10.8% APRC variable

Do you pay interest on a home equity loan?

You have to pay interest on a home equity loan or a home equity line of credit. However, the interest rates are not usually the same and the way the interest is repaid differs between both credit options.

We’ve explained more just below. 

What is an interest-only home equity loan?

An interest-only home equity loan is a loan that gives you a loan amount based on your home equity (and uses it as collateral). But instead of making payments to repay the loan value and the interest, the homeowner only needs to pay the interest through monthly payments and never any of the principal. 

Interest-only home equity loans are officially called interest-only mortgages (when used to release equity). We’ve explained how a specific type of interest-only mortgage works to release equity just below. 

Can you get interest-only home equity loans?

There are credit options that let you borrow based on your home equity and only require interest-only repayments. Sometimes they are called interest-only home equity loans, but that’s not a 100% correct name for them. 

Change the amount you are looking to borrow to see what offer you could get

£

Lender

APRC

Monthly payment

Total amount repayable

United Trust Bank Ltd

6.34%

£219.34

£26,320.83

Pepper Money

6.86%

£220.24

£26,429.17

Together

7.99%

£222.20

£26,664.58

Selina

8.45%

£223.00

£26,760.42

Equifinance

9.95%

£225.61

£27,072.92

Evolution

10.2%

£226.04

£27,125.00

Spring

10.5%

£226.56

£27,187.50

Loan Logics

11.2%

£227.78

£27,333.33

Should I use an interest-only home equity loan?

The decision to use an interest-only home equity loan to release equity is an entirely personal decision, which will also be determined by eligibility and subject of approval. 

Many families choose to sit down with family and explain the situation, especially with those who are likely to be beneficiaries of the homeowner’s will. Using the service of a finance or mortgage professional first is highly recommended and sometimes mandatory. 

How do interest-only mortgages work?

Interest-only mortgages only require the individual to pay back the interest on the mortgage rather than the actual loan borrowed. However, at the end of the mortgage, the full mortgage balance will still be owed. The benefit of an interest-only mortgage is that monthly payments are significantly lower.  

Some people put the money they save into investments to repay what is owed at the end for cheaper (IF those investments are profitable during the course of the mortgage). 

These types of mortgages soared just after the financial crisis of 2008 when people struggled to get mortgages. However, many lenders were providing these mortgages without ensuring the homeowners would be able to repay the capital at the end of the mortgage and struggled to repay. It has now become more difficult to get a standard interest-only mortgage. 

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Eligibility for a retirement interest-only mortgage

To be eligible for a retirement interest-only mortgage, you must own a home in the UK, and the home you want to release equity from should be your main residence. 

Although some sources will tell you that a retirement interest-only mortgage is only available for people over 55, there is no actual age restriction. However, most lenders will only provide this equity release option to people over 55, and more certain if you are in your 60s. 

For borrowers to be approved, they will need to prove to the lender that they can afford the interest repayment each month. 

How much equity do you need for an interest-only mortgage?

To get a retirement interest-only mortgage, you generally need to own the full home outright with no outstanding lien of credit. In other words, you must have 100% equity in the home. If you have some debt attached to the property, it might make it difficult for the lender to recover the funds from a property sale after you die. 

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What’s the difference between a lifetime mortgage and an interest-only mortgage?

A lifetime mortgage is another product that can be used to release equity for retirement. It is also known as a reverse mortgage, but this term is more commonly used in Canada, the USA and Australia. 

Lifetime mortgages allow the homeowner to access home equity as a lump sum or ongoing monthly payments. The funds are only paid back upon death from the homeowner’s estate (possibly through the property being sold), or if the property is sold before death to go into aged care. 

If there are two homeowners, which is common for married or de facto couples, then the principal and interest will only be repaid when the surviving partner dies.

They can be identical to an RIO mortgage where the homeowner makes interest payments over time and therefore makes it another type of interest-only home equity loan. 

The benefit of this is that it increases any remaining inheritance to beneficiaries. Otherwise, the homeowner can choose to make no monthly payment at all and allow the interest to roll up and be paid from the estate. This is the main difference between a lifetime mortgage and a retirement interest-only mortgage.

To get approved for a lifetime mortgage you will need to check off eligibility criteria similar to the RIO mortgage. However, applicants will still need to have their personal financial situation assessed, including their credit score. 

HELOCs aren’t interest-only forever!

Because you only have to pay the variable rate of interest on a HELOC during the draw period, some people categorise them as interest-only home equity loans – but they are not. 

A HELOC is not an interest-only home equity loan because you have to repay the principal at a later stage. They’re only interest-only for an initial period of a few years. 

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The authors
Scott Nelson Profile Picture
Author
MoneyNerd’s founder, Scott Nelson, has a decade of financial industry experience, including 6 years in FCA regulated loan and credit card companies. Troubled by a lack of conscience in the industry, he founded MoneyNerd to give genuine advice to those in debt and struggling financially.
Janine Marsh Profile Picture
Financial Expert
Janine Marsh is an award-winning presenter and a valuable member of the MoneyNerd team. With a wealth of experience as a financial expert, she's been featured on BBC Radio 4, BBC Local Radio, and BBC Five Live, and is a regular on Co-op Radio.