The term equity refers to the difference between the market value of a property and the amount that is owed on a mortgage. As the mortgage decreases due to repayments, equity will increase. An equity release mortgage also known as a cash release scheme is a special mortgage that is made available to people who have already completed paying off their mortgage or who have a small amount of left to be paid. The term releasing equity gives people the ability to convert equity to cash. An equity release is ideal for older people who want to increase their income by using their property but do not want to move out from their house.
An interest-only mortgage on the other hand is different from an equity release scheme becuase people do not have to be old in order to be eligable for this mortgage. There are however several main differences between an interest-only mortgage and an equity release. One of the main differences is that an interest-only mortgage payment brings along monthly repayments with it. An equity release does not come with monthly repayments because the lender has leverage in the form of his or her property, cash or an existing lifetime mortgage. With an interest-only mortgage, the interest is repaid on a monthly basis and the loan amount which remains the same during the loan duration needs to be paid when the house is sold, if the borrower dies, or if he or she moves into long term care.
So how is an interest only mortgage calculation done? First of all, the value of the property needs to be determined. Then your age and your income is assed to determine the amount that you are allowed to borrow. Your income needs to be sufficient to pay the monthly payments and to sustain your living standards.
Choosing between an interest-only mortgage and an equity release will dependent on several factors including your age. The value of your property will also determine the option that you should choose. If the value of properties are continuously rising, an interest only mortgage might be more considerable because at the end of the mortgage duration, you property would have risen in value allowing you to be able to sell the property, repay the loan, and place the profit in the bank.
If you are older, an equity release might be the better option for you especially if you have already paid off your initial loan or close to paying it off.