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Using equity release to pay off your mortgage

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By Richard Groom • 28 October 2022 • 9 min read

How to release equity to pay off a mortgage

Clearing your mortgage can boost your available income each month – and maybe even help you sleep better at night. One way to do this in later life is with an equity release plan, which ends the need for monthly payments.

If you are in or approaching retirement and still paying off your mortgage, then you’re not alone. According to The Telegraph in April, UK homeowners aged 55-to-64-year-old had an average of £106,100 left to pay on their mortgages last year. 

In this article, we explore using equity release to pay off the mortgage, as well as some alternatives:

  • What is equity release?
  • Can I use equity release to pay off my mortgage?
  • Can I release enough equity to pay off my mortgage?
  • Equity release to pay off an interest-only mortgage
  • Alternative ways to pay off your mortgage 
  • Other reasons why people do equity release
  • Finding a specialist

What is equity release?

For those unfamiliar with the product, equity release allows homeowners to turn some of your property value into tax-free cash without having to sell. Plans are available to over-55s and you can unlock money from your current home, or a second home that you own. 

The most common form of equity release is a lifetime mortgage. With this type of plan you continue to own 100% of your home and can receive your money as a single cash lump sum or in smaller amounts as and when you want it. 

There are no mandatory monthly repayments. Instead your estate will typically repay your loan by selling your home when you pass away or move into long-term care. You can however make partial repayments up to a certain amount (varies according to the provider) without incurring any penalties. There are also interest-only equity release plans which enable you to pay the interest each month so the original loan amount never increases.

Can I use equity release to pay off my mortgage?

It’s no secret that many homeowners in and approaching retirement are struggling to combine mortgage payments with their other outgoings. In fact, according to Money Week, almost one-in-ten people still have mortgage debt when they reach retirement age. That may be fine if you have a healthy pension in place to fund your mortgage repayments, but what if this isn’t the case?

The good news is that you may be able to use equity release to pay off your mortgage, as long as you have enough equity in your home to cover the outstanding mortgage. You will also need to use the money you release to pay off any other loans secured against your home.

You will also need to meet eligibility criteria for an equity release plan. The criteria differs depending on the provider you use, but typically you must:

  • Be aged 55 or over (both of you if a couple)
  • Own a property worth £70,000 or more

Could using money from equity release to pay off your mortgage help you enjoy a bigger disposable income each month? Find out how much you could release – check here or call our friendly team now on 0808 178 3055 or request a call back.

Can I release enough equity to pay off my mortgage?

Assuming you have enough equity in your home to clear your mortgage debt plus any other loans secured against your home, then you may be able to pay off your mortgage with equity release. 

Many people have built up equity that exceeds their mortgage debt by the time they reach the minimum qualifying age of 55. According to the Equity Release Council’s (ERC) Autumn Report 2022, the average house price in the first half of this year was £286,397; the average mortgage debt was £65,299. That means there is £221,098 of equity in a typical UK home – much more than the average mortgage debt. 

However, having enough equity in your home isn’t the only thing that will determine how much you can release. Other factors will also be considered. These include your age (the older you are, the more you can release), your property’s value, and the type, location and condition of the property. 

If you are interested in using equity release to pay off your mortgage then you’ll need to speak to an adviser. He or she will be able to work out if you can release enough equity from your property to clear your outstanding mortgage. If you do, they will be able to recommend the best plan for your circumstances. 

To find out how much you could unlock with a plan, check here or contact us to arrange an appointment with one of our selected equity release advisers.

Equity release to pay off an interest-only mortgage

Homeowners who took out their interest-only mortgages in the 1990s are likely to have seen significant price increases on their homes since. According to the Nationwide House Price Index, the average UK property has increased by £220,892 in the last 30 years, rising from £52,243 to £273,135. It means many people in and approaching retirement could have homes with enough equity to pay off the capital on their interest-only mortgages.

Some homeowners choose to release this equity by selling their home and downsizing to pay off the shortfall on their interest-only mortgage. It can be a heart-breaking decision, and potentially an impossible one for those living in a small home or flat with no way to downsize further.

But there is an alternative: today’s homeowners concerned about their shortfall do have the option to use equity release to pay off an interest-only mortgage. An equity release plan can provide a tax-free cash lump sum to settle an interest-only mortgage without the need for any monthly repayments. Crucially, the loan plus interest isn’t repayable until the property is sold when you pass away or move into long-term residential care. 

If continuing your interest payments is important to you, you can select an interest-only equity release plan to ensure your loan never grows in size. You can choose to end these interest payments at any time, at which point your plan switches to a standard lifetime mortgage and the interest rolls up each month. Either option means you could clear your interest-only mortgage without having to sell your home.

Homeowners should consider all the pros and cons of an equity release plan when weighing up using equity release to pay off an interest-only mortgage. For instance, a plan will reduce the value of your estate and the amount of inheritance you leave for your loved ones. Also, the level of interest that accrues on your plan could amount to far more than what you may be paying on your current mortgage deal.

Alternative ways to pay off your mortgage 

Of course, there are other ways that you can handle your existing mortgage or release equity to pay off a mortgage. Some of the options available to you might include:

Getting a mortgage extension: You may be able to extend the term of your existing mortgage by speaking to your lender. This might be a preferable alternative if you have a clear plan for paying off the outstanding capital in the coming months or years. Perhaps you intend to downsize your home, or you expect a windfall to come in from selling a family business or other properties you own.

Remortgaging: If your mortgage term is ending and you still have outstanding capital to repay, you could look into remortgaging to give yourself longer to settle your loan. You could remortgage with your existing lender, or a new one entirely. Your existing lender may be able to switch you from an interest-only mortgage to a repayment plan, or they may agree to extend your current mortgage arrangement. 

If you remortgage with a different lender, you will have to pass their affordability checks which you might not have had to do previously. Remember, remortgaging may mean you move to a higher interest rate with your new or existing lender.

Retirement interest-only mortgage: A retirement interest-only mortgage (RIO) allows over-55s to unlock a cash lump sum from your home. Like an equity release plan, you do not have to repay the loan until you pass away or move into long-term care as there is no fixed term. 

However, this is an interest-only mortgage which requires you to service the monthly interest until your plan comes to an end. As with a standard mortgage, if you default on these repayments then you could lose your home. 

The rate you are offered is fixed for life, so your payments will never change. It may work for you if your own interest-only mortgage term is coming to an end and you can afford to continue making these monthly payments throughout your retirement.

A more flexible alternative to a RIO is an interest-only lifetime mortgage. With this type of equity release plan you pay the interest off every month to prevent the loan from growing in size. However, you have the freedom to stop these monthly payments at any time. If you do this, your plan switches to a standard lifetime mortgage. The interest then rolls-up each month until you pass away or move into long-term care.

Downsize: If your home has risen in value since purchasing it, you may be able to downsize to a smaller home or a less expensive area to free up the money you need. Many people intend to downsize in later life as a large family home can be expensive and time-consuming to maintain. This way, you can find a more suitable home for your retirement years – perhaps closer to your family – and pay off your mortgage in the process.

Other reasons why people do equity release

If you can relate to the feeling of being ‘asset-rich, cash-poor’, perhaps you are considering joining the thousands of homeowners using their properties to settle their mortgage. But as well as releasing equity to pay off mortgage debt, money you unlock with equity release can be spent in any way you wish. 

Figures from the Equity Release Council’s Autumn 2022 Market Report show that over 47,300 homeowners unlocked their property wealth in the first half of 2022 – a 32% increase on the year before. Here are some of the reasons why these homeowners released money from their homes:

  • Make home and garden improvements, such as a new kitchen, conservatory or a landscaped garden.
  • Adapting your home to assist with independent living. You may require a downstairs wet room, widening of your doorways, a stair lift or a mobility scooter.
  • Financing large or costly home repairs such as a new roof.
  • Paying off credit cards and loans including car loans.
  • Needing a larger disposable income to enjoy a comfortable retirement.
  • Paying for privately funded health care such as medical bills or receiving care in the home.
  • Helping loved ones with a deposit on a home. Or you may want to help pay for a wedding, or provide them with a living inheritance now when they need it most.
  • Buying a new car, taking a luxury holiday or purchasing a holiday home.

Read more: What can you use equity release money for?

Speak to an equity release adviser

If you are thinking about using equity release to pay off a mortgage then you’ll need to speak to a specialist before making any decisions. At Equity Release Wise we can connect you to one of our selected advisers who will take the time to explain everything to you and make sure you are aware of all your other options, too. 

Our selected advisers will expertly answer all your questions, including “can I use equity release to pay off my mortgage?” or “can I use equity release to pay off my interest-only mortgage?” In addition, he or she will find out exactly how much you could release and if you could be eligible for preferential rates based on your health or lifestyle.

Remember, you have multiple plans and features to choose from when using equity release to pay off your mortgage. You can ringfence a percentage of your home’s value to protect it as an inheritance, or you could select an interest-only plan to prevent your loan from growing in size. Remember, with an interest-only equity plan you can switch to a standard plan at any point so you won’t have to continue making the payments if you no longer wish to.

Call our friendly team today on 0808 178 3055 to find out more, or click here to request a free call back at a time that suits you.

About Richard Groom. A writer with 20+ years’ experience across several sectors including financial services, Richard has a passion for writing clear and simple content on even the most complex of subjects. In his spare time, Richard loves exploring the hills and mountains of the UK on long walks with his faithful cocker spaniel. Follow Richard on LinkedIn

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