Applying for Equity Release Schemes With a Mortgage
The typical solution is to apply for an equity release loan and use some cash to pay back the other mortgage before using it for anything else.
As a theoretical example:
- Your home is valued at £500,000.
- The current mortgage owing is £100,000.
- An equity release lender offers you a loan of £250,000.
- You pay back the £100,000 and keep the £150,000 balance to do with as you wish.
That example is just one possible approach - you can also decide to pay back some of the mortgage to reduce your monthly repayments, clear the mortgage altogether or use equity release to boost your retirement income.
The alternatives available will depend on the equity release scheme you go for and how much of your equity you'd like to borrow against.
Equity release works on the principle that you borrow against your property value and generally make no repayments at all or make contributions solely towards the interest,
When you pass away or enter into care (or decide to sell your home), the equity release loan is repaid, including interest that you haven't paid back already.
Therefore, provided you've got sufficient equity to secure the amount you'd like to borrow and can leverage that ownership to pay back another mortgage, there is no reason you can't opt for this strategy.
The downside is that you need to be conscious of potential interest costs because it could mean that your estate ends up with less money to distribute to your beneficiaries than you expect.
Different Types of Equity Release Explained
There are two main types of equity release loans - a lifetime mortgage or a home reversion loan.
Although both products have similar concepts, the terms differ.
Lifetime mortgages, or retirement mortgages, allow you to borrow cash against your home but with the right to live and retain ownership of your property for life.
Normally the interest is repaid with the original amount borrowed when you die or sell the property.
Home reversion plans aren't the same because you sell all or some of your property to the lender, often for less than it would be worth on the market.
You get an immediate cash lump sum and the guaranteed right to live in your home, but the lender takes out their proportion when you pass away or sell your home.
We recommend seeking professional advice before making either long-term financial commitment - it's worth bearing in mind that while you can apply for a lifetime mortgage from age 55, home reversion loans are normally available from 65 and above.
Which Type of Loan Do Equity Release Advisers Recommend for Applicants With a Mortgage?
Equity release is a big decision, but it's a viable way to supplement your retirement income, reduce your mortgage repayments, access a regular cash payment, or withdraw a lump sum.
There isn't one answer that is suitable for every homeowner because your best course of action and whether equity release is indeed the right option will depend on:
- Your financial circumstances
- The capital you'd like to borrow
- Your longer-term aspirations
- Inheritance planning
Specialist guidance is strongly advisable, so you can compare equity release schemes, products, lenders and charges to make an informed choice.
Is the Cost of Equity Release Lower Without a Mortgage?
If you have already repaid 100% of your mortgage or own a property outright, you can apply for an equity release scheme without deciding how to use that cash to reduce your existing debt.
Equity release mortgages normally last until you sell your home, pass away or go into care, with interest added to the balance.
Costs may be lower if you apply for a smaller amount of borrowing, own a larger proportion of the equity, or make interest repayments to manage the total outstanding.
What Alternatives Are There to the Cost of Equity Release?
In some cases, equity release isn't applicable, often because you don't have enough equity to use as security and take out a loan to pay back everything you owe.
There are still several ways to release the financing you need, although the right option will depend on several considerations.
- Retirement interest-only mortgages work like a lifetime mortgage, although you pay back the interest so the total debt won't increase every month.
- Normal retirement mortgages are the same as a lifetime mortgage, and you can either borrow a lump sum or make drawdowns from a total credit facility when you need them.
- Secured loans or second charge mortgages are another way to use your equity to borrow and are normally suitable even if you have a relatively poor credit score.
The pitfall to note with a secured loan is that you are at a repossession risk if you don't keep up with the repayments, which doesn't apply on an equity release or lifetime mortgage.
Can I Sell My House if I Have Equity Release Debt?
If you have an equity release mortgage, it doesn't mean you can't decide to sell your home if you decide to move or downsize.
You'd use the sale proceeds to pay back the outstanding loan and keep anything left over.
The issue is that you would need to pay the original capital borrowed plus the interest rolled up, and some lenders will levy an early repayment charge.
Early settlement fees can be steep, so it's wise to review mortgage products with this in mind if you think you might wish to sell up at some point.
Speak to the Expert Equity Release Advisers
There is a lot to consider when deciding whether equity release is right for you, and there are multiple lenders who will consider applicants with or without an existing mortgage.
Please get in touch if you would like more information about any of the topics we've discussed here or to arrange a confidential chat with one of our equity release professionals.
Mortgage Brokers is a whole-of-market, independent brokerage.
We endeavour to provide clear, transparent information so you can make the best decisions to secure your financial future and a comfortable retirement.
