Equity release vs remortgage: how do you choose?

Remortgage vs equity release – which is right for you?

If you have built up equity in your home and want to release some of it as cash, what’s the best way to do it? Remortgaging is one option, but equity release could be an alternative if you are 55 or older.

Equity release might be suitable if you don’t want to make monthly mortgage payments. That can be important for many later life borrowers who are on a restricted income. But there are pros and cons of equity release, just as there are with remortgaging.

This guide covers several issues to help you understand the difference between equity release and remortgage borrowing:

• What’s the difference between equity release and a remortgage?
• How does a remortgage to release equity work?
• How does equity release work?
• Equity release vs remortgage – the main differences.
• The differences between equity release and a remortgage at a glance.
• How do I choose between a remortgage vs equity release?
• Advice to help you choose a remortgage or equity release.

If you are looking at the pros and cons of equity release vs additional borrowing through a remortgage, we hope this guide will help. Our selected advisers are also available to discuss your circumstances and offer further information and advice on equity release and remortgaging. Just call us on 0808 178 3055 or request a call back and we’ll arrange a no-obligation appointment for you.

Please note: This article is provided for information purposes only and does not represent financial, mortgage or investment advice. If in doubt, you should seek independent financial advice.

What’s the difference between equity release and a remortgage?

‘Remortgaging to release equity’ and ‘equity release’ may sound the same, but the two terms refer to two different things:

• With a remortgage, you can release equity from your home through further borrowing. But doing so will likely add to your monthly mortgage repayments and you will need to pay back the mortgage by the end of the mortgage term.
• With an equity release plan (available only if you are 55+) you don’t have to make monthly repayments. Instead, the loan is repaid through the sale of your home when you pass away or move into long-term residential care.

How does a remortgage to release equity work?

Remortgaging is when you switch to another mortgage to borrow additional money as a cash lump sum. You might remortgage through your current lender or a different lender. 

As you are adding to the size of your mortgage, your monthly payments will typically increase. This may however be offset if interest rates have fallen since you took out your mortgage, if your loan to value is now lower, or if you extend the term (length) of your new mortgage.

Remortgaging is typically cheaper in the long run than equity release. But it can get harder to remortgage as you get older. If you have retired or are approaching retirement, the lender may decide that you won’t have enough income to keep up the extra repayments.

How does equity release work?

Equity release is another way to access tax-free cash from the value of your home, but it’s paid back in a different way. You don’t have to make monthly repayments, as it’s typically paid back only when you pass away or move into long-term care. 

The most popular type of equity release is a lifetime mortgage. This is a loan secured against your home, which you continue to own and live in. 

A less common type of equity release is a home reversion plan. This involves selling all or a proportion of your home in exchange for tax-free cash. You continue to live in your home rent-free.

Equity release vs remortgage – the main differences

Choosing between a remortgage or equity release requires careful consideration, and ideally professional advice. There are pros and cons to both options. You may also find that one or both of them isn’t available to you due to your personal circumstances.

There are number of differences to take into account:

Eligibility based on your age:

• Equity release is only available to over 55s, and you can release more money the older you get. The upper age limit can be as high as 90.
• Remortgaging has no across-the-board minimum or maximum age limits, but lenders may be unwilling to offer you a new mortgage as you get older.

How much you can borrow:

• Equity release may enable you to access more money than remortgaging, as your capacity to make monthly repayments won’t matter. However, several other factors will affect how much you can release, including your age and the property value.
• Remortgaging means your ability to make repayments could restrict how much money you can release. That could mean less is available than equity release, but each case is different and needs looking at individually.

What happens to your monthly repayments:

• Equity release clears your current mortgage and you’ll have no further mandatory monthly repayments.
• Remortgaging adds to the size of your mortgage, and typically to your monthly repayments.

How you access your money:

• Equity release gives you the option of taking your money as a lump sum, or as a lump sum followed by smaller amounts over time.
• Remortgaging means you typically get all your money as a lump sum. You would likely need to remortgage again later on to access further money.

Affordability tests and credit checks:

• Equity release providers might not require you to go through any affordability tests or credit checks, as you won’t need to make monthly repayments.
• Remortgaging will often involve affordability tests and credit history checks.

The overall cost of the loan:

• Equity release is likely to be much more expensive than remortgaging in the long run, as interest rates are higher than with a typical remortgage. Also, interest ‘rolls up’ on a compound basis and the lender adds this to the loan. However, if you can afford to make interest payments each month to prevent this, you can do so with an interest-only lifetime mortgage. 
• Remortgaging is usually cheaper as it’s done at a lower interest rate. It also involves paying the interest each month, so it doesn’t incur the cost of compound interest.

Risk of repossession:

• Equity release rarely brings a risk of repossession. There are no mandatory monthly repayments, so you can’t ‘fall behind’ in the same way you can with a regular mortgage. If you do choose an interest-only lifetime mortgage and stop making the payments, the plan instead switches to a regular lifetime mortgage and interest rolls up each month.  
• Remortgaging runs the risk of your home being repossessed if you don’t keep up with your repayments. You may however be able to negotiate a temporary break from repayments (mortgage holiday) with your lender.

The effect on the inheritance you leave:

• Equity release will reduce any equity left in your home when the plan ends. You can however partially offset this by choosing to make interest payments while the plan is running. Some plans also come with an inheritance guarantee, where some of the value of your home is ring-fenced to guarantee an inheritance for your beneficiaries. 
• Remortgaging won’t have the same impact on your inheritance, as long as you keep up repayments and clear your loan by the end of the mortgage term.

How do I choose between a remortgage vs equity release?

Remortgaging is likely to cost much less overall than equity release. That’s why it’s usually a good idea to check whether a remortgage is available to you, if you can afford the monthly repayments. Talking to your existing lender is a good starting point, to see what kind of additional borrowing they can offer, and on what terms.

But you may find that a remortgage isn’t available. Or you may feel that taking on more debt will affect your lifestyle and living standards, especially if you are approaching retirement on a restricted income. Equity release may therefore be a more viable or attractive option.

There are many other factors to consider, including whether leaving all your property wealth as an inheritance is important to you. Also, equity release plans typically feature potentially expensive early repayment charges.

Advice to help you choose remortgage or equity release

Our selected advisers are specialists in later life lending. They can provide the information and advice you need, and find you the best remortgage and equity release deals from leading providers. For additional peace of mind, our selected advisers are members of the Equity Release Council, the UK’s industry body that sets standards to protect consumers. 

Simply call us on 0808 178 3055 or request a call back and we’ll arrange a telephone appointment with an adviser. There is no obligation to proceed or a fee for this initial help. Only if you proceed with a remortgage or equity release plan would you pay a fee, which will be explained to you by your adviser in advance.