Can I use equity release to pay off my mortgage?

Yes, it is possible to use equity release to pay off your mortgage. An assessment of your circumstances will be required that will take your age, health, house value into account when deciding if you are eligible.

Whether or not you are able to raise enough equity to clear your mortgage depends on how much is currently outstanding and the current value of your property. 

If you are a retired homeowner or nearing retirement, making mortgage repayments can be stressful and overwhelming. It can be hard if you are on a tight budget. You may be looking at your options and wondering if you can use equity release to pay off your mortgage.

In this insight, we are going to review how equity release works and how it could be used to remove the need to make mortgage repayments.

Key Takeaways

• You can eliminate repayments by using equity release to pay off your mortgage.
• You are able to release 20-50% of your property value depending on conditions such as age, health & property type and value.
• Interest on the equity release will likely exceed what you would have paid on the remaining part of the mortgage.
• Taking equity release leaves less inheritance for your family.
• It's a personal decision, but it is a good idea to seek advice from an equity release specialist

Why use equity release to pay off your Mortgage?

If you're over 55 and struggling with mortgage payments, equity release could be a good option for you. It allows you to use the value of your property to fund your retirement dreams, such as travelling or experiencing new things, without the obligation to make mortgage payments holding you back. With equity release, you can improve your standard of living and make the most of your retirement years.

Using equity release to pay off your mortgage can bring relief and peace of mind, freeing up your income to enjoy retirement without monthly payments.

If you're not over 55, consider your alternative options for equity release under 55.

For example

If you have a mortgage of £40,000 with monthly repayments of £400, and your property is valued at £200,000. If you decide to use equity release, you may be able to release up to 20% of your property value, which equates to £40,000, to clear your mortgage debt. One of the significant benefits of equity release is that you don't have to make monthly repayments. Instead, the loan is repaid only when you sell your property or pass away. With no additional monthly payments required, this can free up your budget, allowing you to use the funds as you wish.

Just keep in mind that equity release is not the right option for everyone and it's important to carefully consider the pros and cons before making a decision. It's always a good idea to speak to a qualified financial advisor to see if equity release is the best choice for your individual circumstances.

How does Equity Release work?

Equity release is a financial product that allows homeowners to access the equity (or value) in their property. There are two main types of equity release: lifetime mortgages and home reversion plans. 

• Lifetime mortgages allow homeowners to borrow money against their property and make no monthly repayments.
• Home reversion plans involve selling a percentage of the property to a lender in exchange for a cash lump sum or regular payments. The lender is entitled to a share of the sale proceeds when the property is eventually sold.

Equity release schemes differ, but typically, you can release 20-50% of your property's value. If the equity you release is enough to cover your outstanding mortgage amount, you can use the funds to pay off your mortgage.

Using Equity Release to pay off your Mortgage

There are two ways you could achieve this:

Using a Lifetime Mortgage to clear your residential mortgage

You can use a Lifetime mortgage to borrow money against your property and make no monthly repayments to do this. The loan, plus interest, is repaid when you die or sell the property. You can then use equity release to pay off your mortgage, do this by using the proceeds to pay off your outstanding mortgage. You will then no longer be required to make any further mortgage repayments either.

Using a Home Reversion plan to clear your residential Mortgage

Home reversion plans involve selling a percentage your property to a lender in exchange for a cash lump sum or regular payments. The lender is entitled to a share of the sale proceeds when the property is eventually sold. To use equity release to pay off a mortgage, you can enter into a home reversion plan and use the proceeds to pay off the outstanding mortgage debt. You will then no longer be required to make further mortgage repayments.

The pros and cons of using Equity Release to pay off your mortgage

There are many pros and cons of equity release. However, there are different pros and cons to consider for using equity release to pay off your mortgage. Here are a few to consider:

Pros:

• Free up income and improve standard of living.
• Provides peace of mind by eliminating the need to make mortgage repayments.
• Can be a good option if you are retired or nearing retirement and do not have the income to make mortgage repayments.

Cons:

• Reduces the amount of equity you have left in their property.
• Interest on the loan can quickly add up, particularly if you live for a long time.
• May impact your ability to obtain credit in the future.

Is it a good idea?

Whether or not it is a good idea to pay off your mortgage with equity release will depend on your individual circumstances. When deciding, you should consider the following factors:

Your age

How do you feel about your age? Do you feel like you are ready to retire or could you carry on working to clear your Mortgage instead?

Your financial situation

 If you have a lot of equity in your property and do not have the income to make mortgage repayments, equity release may be a good option. However, if you have other financial resources, such as savings or a pension, you may want to consider other options.

Your plans for the property

If you plan to leave your property to your children or beneficiaries, using equity release may not be a good idea as it will reduce the amount of equity you have left in the property.

Your attitude towards risk

Equity release is a long-term financial commitment and the loan, plus interest, will need to be repaid eventually. This may be a concern for homeowners who are risk-averse.

It is important to carefully consider all of these factors before deciding whether or not to use equity release to pay off your mortgage. It may also be a good idea to speak to a financial advisor or seek independent legal advice before making a decision.

The overall costs

You will need to calculate what the estimated interest will be on your mortgage if you continue to pay it. You should use this figure to compare the estimated interest that would be due if you proceed with equity release. This will help you to make a fair comparison on the cost of each option. After reviewing the overall costs, you may feel differently about your choice. If you see that the equity release costs more, you might want to consider talking to your family and asking for their opinion. 

Other considerations

Here are some key things to consider when thinking about using equity release to pay off your mortgage:

• How much the loan and interest will cost in the long run
• The impact on your estate and your ability to leave your property to your children or beneficiaries
• Any restrictions on your ability to move or sell the property in the future
• The potential impact on your credit rating and ability to obtain credit in the future
• Alternative options, such as seeking financial advice or exploring other sources of income.

Eligibility requirements of Equity Release

Age

Most equity release products in the UK are only available to homeowners who are over the age of 55.

Property type

Most equity release products are only available for properties that are fully owned and occupied as the main residence. Some products may also be available for holiday homes or buy-to-let properties.

Property value

The amount of equity that can be released is usually based on the value of the property. Some equity release providers may have a minimum property value requirement.

Health

Some Equity release products may require the homeowner to undergo a health assessment to ensure that they are able to understand the terms of the product and make an informed decision.

How can Equity Release advice help?

Speaking to an adviser can help you to decide whether or not equity release is right for you. They will be able to do this in the following ways:

Assessing your eligibility for equity release

 An equity release adviser can help you to determine if you are eligible for equity release based on factors such as your age, property type and value, and outstanding mortgage.

Providing information about the different types of equity release products

 There are several different types of equity release products available, an equity release adviser can explain the differences between these products and help you to choose the best option for their needs.

Calculating the amount of equity that can be released

An equity release adviser can help you to calculate the amount of equity that can be released based on the value of your property and other factors.

Assisting with the application process

An equity release adviser can help you to complete the application process and gather the necessary documentation. They can also help you to understand the terms of the equity release product and ensure that you are comfortable with the agreement.

It is important to note that equity release advisers may charge a fee for their services. It is always a good idea to clarify the fee structure with the adviser before proceeding.
When choosing an adviser, you should look for an adviser who is a member of the Equity release council. The council aims to set high standards of advice and flexibility in the equity release industry.

FAQ's

If you're unsure where to start with seeking equity release advice, you can complete the Sunny Fact Find for mortgage advice. The answers you provide help us to find the best-suited adviser. Your adviser contacts you for a no-obligation conversation on how they can help. You decide how to proceed.