Can I Use Equity Release to Pay Off My Mortgage?
Yes. Equity release can potentially be used to repay an existing mortgage, provided you meet the eligibility and lending requirements of the equity release provider.
For many homeowners approaching or already in retirement, this can become relevant when an existing interest-only or repayment mortgage is coming to an end and there is still a balance outstanding.
One option may be a lifetime mortgage, which is a type of equity release. This allows you to release some of the value tied up in your home without having to sell the property.
The money released can potentially be used to clear your existing residential mortgage. Your current mortgage would normally need to be repaid as part of the equity release transaction so that the new lender can take the required legal charge over the property.
Unlike a standard residential mortgage, there will not normally be a requirement to make monthly capital and interest repayments in the same way. Depending on the product, interest can usually be allowed to roll up and be added to the loan.
This means the balance can increase over time, which is one of the most important things to understand before considering equity release.
For example, somebody may own a property worth £500,000 but still have a £100,000 mortgage outstanding. If an equity release provider is prepared to lend enough based on the applicant’s circumstances and property, part of the money released could potentially be used to clear that £100,000 mortgage.
Whether this is possible will depend on factors including the property value, the amount of mortgage outstanding, the applicant’s age, the property itself and the criteria of the equity release provider.
Equity release is therefore not simply a case of deciding how much money you would like to borrow. The amount available will depend on the individual circumstances and the lender’s maximum lending limits.
It is also important to consider why the existing mortgage needs to be repaid.
Some people reach the end of an interest-only mortgage without having sufficient savings or investments available to clear the balance. Others may want to reduce their monthly commitments as they move into retirement.
Equity release could potentially provide one solution, but it should be considered alongside the other options available.
You can also find more information about equity release standards and consumer protections from the Equity Release Council here.
What Should I Consider Before Using Equity Release to Repay My Mortgage?
Using equity release to repay a mortgage can remove an existing monthly mortgage commitment, but it also changes the way the borrowing works.
One of the biggest considerations is interest.
With a lifetime mortgage, if you choose not to make interest payments, the interest is normally added to the outstanding balance. Future interest is then charged on the increasing balance, meaning the amount owed can grow significantly over a long period.
This will usually reduce the amount of equity remaining in the property and therefore potentially reduce the inheritance left to beneficiaries.
That does not automatically make equity release unsuitable, but it is something that needs to be properly understood before proceeding.
You should also consider whether there are alternatives.
Depending on your circumstances, these could include continuing with a conventional mortgage, taking a retirement interest-only mortgage, downsizing to a less expensive property, using savings or investments, or receiving financial help from family.
The right solution will depend on your own circumstances rather than simply which option produces the lowest monthly payment.
Another consideration is whether you may want to move home in the future. Many modern lifetime mortgage products can potentially be transferred to another suitable property, subject to the provider’s criteria at the time, but this should still be considered before taking the mortgage.
You should also consider whether releasing equity could affect your entitlement to means-tested benefits or your wider financial planning.
Because equity release can affect your finances for the rest of your life, it is important to receive appropriate advice and understand both the benefits and the potential disadvantages.
Can I repay equity release early?
Some lifetime mortgages allow voluntary repayments, but early repayment charges may apply depending on the product and when the loan is repaid.
The exact terms vary between providers, so this needs to be checked carefully when selecting a product.
Will I still own my home?
With a lifetime mortgage, you continue to own your property. The lender places a legal charge against it in much the same way as a conventional mortgage lender.
The mortgage is usually repaid when the property is eventually sold, normally following death or a permanent move into long-term care, subject to the terms of the particular product.
Thinking About Using Equity Release to Repay Your Mortgage?
If you have an existing mortgage approaching the end of its term and are unsure how you are going to repay it, there may be several options available.
I can look at your existing mortgage, the value of your property and your wider circumstances and explain the potential options available to you.
Equity release will not be suitable for everybody, but understanding your choices early can give you much more time to decide what works best for you.
I provide mortgage and equity release advice across Essex, including Romford, Hornchurch, Brentwood, Chelmsford, Upminster and Emerson Park. You can view the areas I cover here.
