Can I Use Equity Release to Pay Off My Mortgage?

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Can I Use Equity Release to Pay Off My Mortgage?

Can equity release be used to pay off a mortgage?

Yes, equity release can sometimes be used to repay an existing mortgage.

This is most commonly done with a lifetime mortgage. A lifetime mortgage allows eligible homeowners aged 55 or over to release money from their home while continuing to live there and retain ownership.

If you still have a mortgage secured against your home, the equity release lender will usually require that mortgage to be repaid when the lifetime mortgage completes.

This means the money released is first used to clear the existing mortgage. Any remaining funds, after fees and charges, may then be paid to you.

For example, if you release £90,000 and your existing mortgage balance is £55,000, the mortgage would normally be repaid first. The remaining amount may be available to you after any fees and costs.

This is only a simple example. It is not a quote or a guide to what you personally could release.

You can read more about how lifetime mortgages work here: /equity-release/how-does-a-lifetime-mortgage-work/

Why do people use equity release to repay a mortgage?

Homeowners may consider equity release to repay a mortgage for several reasons.

• These may include:
• an interest-only mortgage coming to the end of its term
• no repayment vehicle or not enough savings to clear the balance
• monthly mortgage payments becoming unaffordable
• a lender refusing to extend the existing mortgage term
• reduced income after retirement
• difficulty passing affordability checks for a new mortgage
• wanting to stay in the home rather than downsize
• wanting to reduce monthly outgoings
• needing to clear a mortgage before later-life planning

For some people, equity release can provide a way to stay in the home and deal with an existing mortgage. For others, it may be too expensive or unsuitable compared with alternatives.

What happens to your existing mortgage?

Your existing mortgage would usually be repaid on completion of the lifetime mortgage.

The process is normally handled by solicitors. The equity release funds are released, the existing mortgage is cleared, and the old lender removes its charge from the property. The new lifetime mortgage lender then has a charge secured against your home.

You do not usually receive the full gross amount if there is a mortgage to repay.

• The amount you receive personally depends on:
• the gross amount released
• your existing mortgage balance
• any early repayment charge on the current mortgage
• lender fees
• legal fees
• advice fees, if applicable
• other completion costs

This is why it is important to look at the net amount, not just the headline amount a calculator shows.

Can equity release repay an interest-only mortgage?

Yes, equity release is sometimes used to repay an interest-only mortgage.

This can be relevant if the mortgage term is ending and you do not have enough savings, investments or other assets to repay the capital balance.

An interest-only mortgage can become a serious problem if the lender wants the balance repaid and you cannot remortgage or sell easily.

Equity release may be one option, but it should not be the only option considered.

• Alternatives may include:
• extending the existing mortgage term
• switching to a repayment mortgage
• remortgaging to another lender
• using a retirement interest-only mortgage
• downsizing
• using savings or investments
• family support
• selling another asset
• negotiating with the lender
• getting debt or mortgage arrears advice where relevant

The best option depends on your income, age, property, mortgage balance, health, family position and future plans.

What if your mortgage payment is unaffordable?

If your mortgage payment is becoming unaffordable, equity release may reduce or remove monthly payments, but it needs careful advice.

Many lifetime mortgages do not require monthly repayments. This can improve cash flow for some homeowners.

However, if you make no repayments, interest is usually added to the loan. This can increase the balance over time and reduce the equity left in your home.

• If affordability is the main issue, you should also consider:
• speaking to your current lender
• switching product with your current lender
• extending the mortgage term
• moving to interest-only, if suitable and available
• remortgaging
• retirement interest-only borrowing
• budgeting support
• benefits checks
• debt advice
• downsizing

Equity release should not be used simply to avoid dealing with a wider debt or budgeting issue.

Will equity release clear the whole mortgage?

It depends on how much you can release and how much you owe.

• The amount available from a lifetime mortgage depends on factors such as:
• your age
• property value
• property type
• lender criteria
• health and lifestyle, in some cases
• existing mortgage balance
• product features
• interest rates and loan-to-value limits

If the amount available is enough to repay the current mortgage, the plan may be possible in principle.

If the amount available is not enough, you may need another source of money to make up the difference. This could be savings, family support or a smaller mortgage, depending on the circumstances.

If the existing mortgage is too large, equity release may not be possible or suitable.

Read more here: /equity-release/how-much-equity-release-can-i-get/

What if equity release does not provide enough?

If equity release does not provide enough to clear the existing mortgage, you should not assume it is the answer.

• Other options may need to be reviewed, such as:
• asking the current lender about term extension or repayment options
• remortgaging
• a retirement interest-only mortgage
• downsizing
• selling the property
• using savings or investments
• family help
• debt advice if arrears are involved
• reducing the amount needed
• combining more than one suitable option

A lifetime mortgage normally needs to clear the existing mortgage in full, unless the lender allows a specific arrangement. Most homeowners should assume the current secured mortgage must be repaid.

Does equity release mean no more monthly mortgage payments?

It can, depending on the lifetime mortgage.

Many lifetime mortgages do not require monthly repayments. This can be attractive if your current mortgage payments are difficult to afford.

However,?no monthly payments?does not mean?no cost?.

If you choose not to make repayments, interest is usually added to the loan. The balance can grow over time.

Some modern lifetime mortgages allow voluntary repayments. This may let you pay some or all of the interest, or make partial repayments, without committing to a standard monthly mortgage payment.

Repayment flexibility can be important if you want to reduce the long-term cost.

Read more here: /equity-release/equity-release-interest-rates-and-costs/

How does the interest build up?

With a lifetime mortgage, interest is charged on the amount borrowed.

If you do not pay the interest, it is usually added to the loan. Future interest may then be charged on both the original loan and the interest already added.

This is called compound interest.

If you use equity release to repay an existing mortgage, the new lifetime mortgage balance may grow over time unless you make repayments.

This can reduce the equity left in the home and the inheritance available to your beneficiaries.

Your adviser should show you a personalised illustration showing how the balance could grow over time.

Can you make repayments after using equity release?

Many modern lifetime mortgages allow voluntary repayments, subject to lender rules.

This may help if you want to repay your existing mortgage but still control the growth of the new lifetime mortgage.

• Repayment options may include:
• paying some or all of the interest
• making occasional lump sum repayments
• repaying a percentage of the loan each year
• making flexible payments when affordable
• choosing a product with no mandatory monthly payment

The rules vary by lender and product. Some repayments may be allowed without early repayment charges up to set limits.

If you can afford regular monthly payments, a retirement interest-only mortgage or later-life mortgage may also be worth comparing.

Can you use equity release if you are in mortgage arrears?

Possibly, but this needs careful advice.

If you are in mortgage arrears, the situation may be urgent. Equity release might be considered, but it may not be the safest or most suitable solution.

You should speak to your current lender as soon as possible and consider debt or arrears advice. There may be options such as payment arrangements, term changes, support from the lender or other debt solutions.

Using equity release to clear arrears may turn a short-term or arrears problem into a long-term debt secured against your home.

This does not mean it is always wrong, but it needs very careful review.

Can equity release be used to repay other debts too?

It may be possible to use equity release to repay other debts, but this needs extra care.

Repaying credit cards, loans or other unsecured debts with equity release means you may be securing those debts against your home.

This can reduce monthly outgoings, but it may increase the total amount repaid over time and reduce the value of your estate.

If you are considering equity release to repay debts, you should consider specialist debt advice first.

Think carefully before securing other debts against your home.

How could this affect inheritance?

Using equity release to repay a mortgage can reduce inheritance.

This is because the lifetime mortgage and interest are usually repaid from the sale of your home when the last borrower dies or moves permanently into long-term care.

If interest rolls up for many years, the amount owed can grow and leave less equity for your beneficiaries.

However, if the alternative is selling the home or facing mortgage difficulty, some homeowners may decide that the trade-off is acceptable.

• Options that may help reduce the inheritance impact include:
• borrowing only what is needed
• using voluntary repayments
• paying interest where affordable
• choosing drawdown where suitable
• considering inheritance protection
• reviewing alternatives first

Read more here: /equity-release/equity-release-and-inheritance/

Could benefits be affected?

Yes. Equity release can affect means-tested benefits.

If you use the released money immediately to repay your existing mortgage, the benefit impact may be different from keeping a large lump sum in savings. However, any remaining funds held in your account may be treated as capital.

This could affect benefits such as Pension Credit, Council Tax Support or help with care costs, depending on your circumstances.

If you receive benefits, or may claim them in the future, this should be checked before applying.

Read more here: /equity-release/equity-release-and-benefits/

Can you still move house later?

Many lifetime mortgages allow you to move home and transfer the plan to a suitable new property. This is called porting.

However, the new property must meet the lender?s criteria. If the new property is lower in value or not acceptable to the lender, you may need to repay part or all of the lifetime mortgage.

Early repayment charges may apply, depending on the product and the circumstances.

If you think you may move later, this should be considered before using equity release to repay your mortgage.

Can you repay equity release early?

You may be able to repay a lifetime mortgage early, but early repayment charges may apply.

This matters if you use equity release now but later decide to sell, downsize, remortgage or repay the debt from another source.

Early repayment charge structures vary between products. Some are fixed. Some reduce over time. Some depend on market conditions. Some products include exemptions in certain situations.

Before applying, ask how early repayment charges work and whether the plan gives enough flexibility.

What alternatives should be considered?

Before using equity release to repay a mortgage, alternatives should be reviewed.

• These may include:
• product transfer with your existing lender
• remortgaging to a new lender
• extending the existing mortgage term
• switching mortgage type
• retirement interest-only mortgage
• later-life mortgage
• downsizing
• using savings or investments
• family support
• selling another asset
• negotiating with the lender
• benefits or budgeting support
• debt advice if arrears or wider debts are involved

Equity release may still be suitable, but a good recommendation should explain why the alternatives are not better for your circumstances.

Read more here: /equity-release/alternatives-to-equity-release/

When might equity release be suitable for paying off a mortgage?

• Equity release may be suitable where:
• you are aged 55 or over
• you want to stay in your home
• the amount available is enough to clear the existing mortgage
• monthly mortgage payments are unaffordable or unsuitable
• other mortgage options are unavailable or unsuitable
• downsizing is not realistic or desired
• you understand the effect on inheritance
• benefits have been checked
• you understand the long-term interest cost
• the product has suitable safeguards
• alternatives have been considered

It should not be recommended simply because it is possible.

When might equity release be unsuitable?

• Equity release may be unsuitable if:
• you can afford a cheaper mortgage alternative
• you plan to move soon
• the amount available is not enough to clear the mortgage
• benefits would be seriously affected
• you want to leave the full property value as inheritance
• you do not understand the long-term cost
• the main issue is wider debt or budgeting
• you are being pressured by family or creditors
• downsizing would better meet your needs
• the product lacks suitable flexibility
• early repayment charges could cause problems

A good adviser should be willing to explain why equity release is not suitable if another option is better.

Questions to ask before using equity release to repay a mortgage

Before deciding, ask:

• How much do I owe on my current mortgage?
• Are there early repayment charges on my current mortgage?
• How much equity release could I get?
• How much would be left after repaying the mortgage?
• What fees apply?
• What interest rate applies?
• Will I make repayments or let interest roll up?
• How will the loan balance grow over time?
• Could I remortgage instead?
• Would a retirement interest-only mortgage be suitable?
• Could my current lender offer another option?
• Would downsizing be better?
• Could benefits be affected?
• How will inheritance be affected?
• Can I move home later?
• Can I repay the lifetime mortgage early?
• What happens if I need care?
• What alternatives have been considered?

A suitable recommendation should answer these questions clearly.