How Does an Interest-Only Equity Release Work?

Equity release is a type of mortgage product that can allow you to access finance that is otherwise locked within your assets.

An interest-only equity release mortgage – more commonly known as a lifetime mortgage – will allow you to borrow money based on the value of your home and can allow you the choice of paying only the interest of your loan each month.

In this guide, we’ll break down everything you need to know about how interest-only equity release works, what’s involved, the advantages and disadvantages, and what you need to keep in mind when exploring your equity release options. Let’s begin.

What is an Interest-Only Equity Release?

In its simplest form, equity release is a way for homeowners – typically with a minimum age of 55 – to access money tied up in their home without needing to sell or move.

There are two main types of equity release:

• Lifetime Mortgages
• Home Reversion Plans.

Specifically, a Home Reversion Plan allows you to sell a portion of your home to a lender in exchange for a cash lump sum or regular income.

While you can continue to live in your home, you would no longer fully own it. These types of equity release plans are increasingly less common today, and not the focus of this article.

Instead, the most common equity release plan is titled a Lifetime Mortgage. This type of equity release mortgage plan includes an interest-only repayment structure.

A lifetime mortgage is a loan secured against your home that allows you to borrow a lump sum of money, and stay living there for the rest of your life.

The payment structure with an interest-only equity release mortgage is set out so that you can choose to make monthly payments to cover only the interest on the loan, but you don’t need to repay the capital borrowed during your lifetime.

Generally, the full loan is usually repaid from the sale of your home when you pass away or move into long-term care, and any money left from the sale goes to you or your beneficiaries.

By covering the interest-only repayments monthly, you are able to prevent the loan from growing over time, helping protect the value of your estate and providing you with more control over your finances in later life.

Here’s a quick example to help outline the typical structure of a lifetime mortgage:

• Let’s say you release £100,000 through an interest-only equity release plan and your interest rate is 5%.
• If you choose to pay the interest monthly, your mortgage payments would be around £420 per month.
• If you ensure that you keep up with your monthly interest mortgage payments, the total capital of your loan would still be £100,000, and you would avoid any compound interest.

Please note: This example is used to help illustrate how the lifetime mortgage product works. Your specific equity release will involve different quantities of money and interest rates. Additionally, you would be able to choose how much of a loan you wish to place against your home, depending on the lender’s criteria.

For many, a lifetime mortgage plan offers a flexible way to free up funds for retirement, life plans, or to support family, all while staying in the home they love.

What Are Equity Release Interest Rates?

Understanding the interest rates for equity release can provide you with a key insight into different lender’s rates and what you can expect to owe over the time of your mortgage.

Crucially, if you decide to take out an interest-only equity release mortgage, you’re borrowing money against the value of your home. As such, the interest will be charged on that amount.

Interest rates will vary, but there are two main types of interest rates that you’ll encounter:

• Fixed rates: As the name suggested, this means the rate will stay the same throughout the life of your loan.
• Variable rates: This type of interest rate can go up or down, which means your monthly repayments could change depending on the economy and the market.

Typically, interest-only equity release will often have higher rates than standard mortgages, however, the flexibility of only paying the interest each month has the distinct advantage of making it more manageable for some.

It’s important to look at both the initial interest rate and the long-term cost when considering your options.

If you’re thinking about exploring an interest-only equity release mortgage, then working with a trusted mortgage broker – like Boon Brokers – will help you find the best lifetime mortgage match for you. Our expert mortgage advisers will guide you through the entire process, from start to finish, ensuring you understand and are happy with your mortgage choice.

What Lenders Look For: Essential Criteria Explained

Similar to any other mortgage product, before you are approved for a lifetime mortgage and can access the funds from your interest-only equity release, lenders will need to ensure you meet certain criteria.

The specific requirements can vary from one lender to another, but there are five primary factors that most equity release lenders will look at:

Loan to Value (LTV)

The Loan to Value (LTV) ratio will be the key factor in deciding how much you can borrow.

The LTV represents the proportion of your property’s value that you will want to place your loan against. For example, if your home is valued at £200,000, and you wish to borrow £100,000, the total LTV would be 50%.

LTV will also be decisive in how much the lender will be willing to loan you. Generally, this amount will be predicated upon your age, property type, and sometimes the location of your property.

If you’re unsure about what loan to value ratio is, or how much you could borrow, many lenders will offer free valuations. In addition, there are many online tools that are available, such as Boon Brokers equity release calculator.

Age Guideline

Age is another important consideration for equity release mortgage products. Most lenders will set both a minimum and maximum age requirement, as they want to ensure the loan is repaid in a reasonable time frame.

Conversely to a standard mortgage, with an equity release mortgage lenders will often offer higher potential loan amounts to those who are older. This is because they expect the loan to be repaid sooner as you’re more likely to move into care or pass away.

Notably, some lenders do have upper age limits, typically around 85 or 90, but this varies depending on the provider and the type of product. For a detailed guide on the equity release age limit, read our latest article: The Equity Release Age Guidelines in 2025

If you’re concerned about age restrictions, or curious about how your age can affect your equity release mortgage, it’s always worth talking to a fee-free mortgage broker who can help you explore your options.

Income Criteria

The income criteria for lifetime mortgages and equity release products in general are not the same as normal mortgage products. You would not need to prove a regular income, though some lenders may still want to ensure that you would be able to manage the monthly interest payments.

Should you be receiving money from a pension, rental properties, or any other income source, lenders will simply want to know you can comfortably manage the interest payments from month to month.

If your particular position means that you no longer have any regular usable income, there are some equity release plans that can allow you to roll the interest into the loan itself. This will inevitably increase the amount you owe over time, but might offer the flexibility that best matches what you’re searching for.

Before deciding on your specific equity release mortgage, it is always best practice to seek financial guidance.

At Boon Brokers, we welcome family members or friends to attend any meeting or call about your equity release plans – though this is up to your personal discretion. The aim is to provide clear and concise mortgage advice so that you can fully understand the process and your options available.

Credit Check

A credit check will usually be completed as part of your application for a lifetime mortgage. However, the criteria for a lifetime mortgage is generally more lenient than that of a standard mortgage, and so securing an interest-only equity release with bad credit is often possible.
The primary focus of lenders will be on the value of your home and your age, rather than your credit history. With that being said, having a poor credit rating could affect the interest rates, leading to higher rates that reflect any additional risk for the lender.

Property Location

Property location and type will play a role in your equity release application. Generally speaking, homes in areas with high demand will be able to access more equity release mortgage options, while remote properties might incur lower borrowing limits and fewer lender options.

Similarly, the property type will directly affect your potential for equity release. While properties such as houses, bungalows, flats, and maisonettes are all generally considered eligible for equity release, should you have an unusual property type; such as a caravan, commercial property, or park home, then you may not meet many lender’s criteria.

What Are the Pros and Cons of Equity Release Interest Rates?

Naturally, there will be both advantages and disadvantages associated with interest-only equity release mortgage products. As such, we’ve outlined the top three benefits and downsides of an equity release mortgage below:

Benefits of Equity Release

Here are the top three benefits of interest-only equity release mortgages:

• Lower Monthly Repayments: As with any interest-only mortgage, since you’re only paying the interest, your monthly repayments are notably lower than if you were paying off the entire loan itself. Additionally, the lifetime mortgage loan will only need to be repaid after you pass away or are moved into permanent care.
• No Need to Sell Your Home: There is no need to leave your lovely home. You don’t have to move out or sell your home to access the equity, the loan is simply placed against your home which can be particularly appealing if you want to stay in your property long-term.
• Flexible Use of Funds: The money from equity release can be used for a variety of purposes. Whether you have planned a personal retirement bucket list, want to pay off existing debts, or support retirement income – the choice is yours.

Downsides of Equity Release

Here are the top three downsides of equity release to consider:

• The Loan Can Grow: If you miss a monthly interest payment or choose not to pay the interest, the loan amount will grow due to compound interest. As such, the amount you owe will increase over time as interest is added. This can lead to a larger debt when the loan is repaid.
• Impact on Inheritance: If you’re planning to leave an inheritance, securing an interest-only equity release might reduce the overall value of what you will be able to pass on to your family. It’s always best practice to discuss your equity release plans with a financial adviser alongside family members, before making any decisions.
• High Interest Rates: Compared to standard mortgages, the interest rates for equity release mortgages are high. While this is in place to outweigh the benefits that equity release offers and to limit the risk for lenders, it is a factor that you will need to consider.

How Can an Equity Release Broker Help You?

Understanding the terms, benefits, and considerations of equity release can feel quite complex. In short, navigating the mortgage world of interest rates and the different mortgage criteria is difficult.

The good news – we’re here to help you.

Working with a trusted mortgage broker can help you sift through all your available options, helping you find the best deal for your circumstances.

Here at Boon Brokers, we specialise in equity release mortgages and can work on your behalf to compare different plans and find the one that best suits your needs, without the extra cost of broker fees. Yes, we’re completely fee-free!

If you’re thinking about releasing equity from your property but are unsure where to start, contact Boon Brokers today – our expert advisers can help answer all your questions and secure the perfect interest-free equity release mortgage for you.