Equity Release With a Mortgage
Equity release is possible with an existing mortgage, but the equity release funds must first be used to clear the existing mortgage debt.
This article contains tops tips from our experts, backed by in-depth research.

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Bert Hofhuis
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What Exactly Is Equity Release With a Mortgage? Learn About the Types of Mortgages, the Interest Rates & Charges Applicable, & if It’s the Right Option for You. Keep On Reading...

Key Takeaways

  • Heads up: If you’ve got a mortgage but are eyeing equity release, you’ll need to pay off that mortgage first using your funds from the equity release loan.
  • The remaining loan amount you can access will be lower if you’ve still got a chunk of your mortgage to pay off, as repaying your old mortgage basically eats into your available cash.
  • Banks and lenders will take a peek at your property’s value and what you still owe on your mortgage to figure out if you can go ahead with equity release and how much you can get.
  • Thinking of using equity release to handle your mortgage in retirement? It could mean waving goodbye to those monthly payments, depending on the plan you pick.
  • It’s definitely a good idea to chat with a financial advisor before diving in. They’ll help you see how using equity release to pay off your mortgage could play out for your wallet and future plans.

According to a 2022 study done by LV=, 12% of older homeowners in the UK still had a mortgage to repay when they retired.¹

If you’re in this position, could equity release offer the desired financial relief?

This article explores the following topics, drawing on our expertise in the field:

    TimeBank‘s experts have explored everything you need to know about equity release with an existing mortgage, including the advantages, disadvantages, and alternatives you should consider.

    Join us as we navigate the world of equity release and how it works with an existing mortgage in place.

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    Can You Access Equity Release With an Existing Mortgage?

    Yes, you can access equity release with an existing mortgage.

    While many homeowners believe that an existing mortgage prohibits releasing equity, this is a misconception. 

    Depending on the amount of equity available in the property and the outstanding mortgage amount, homeowners may be able to release equity. 

    Important to remember

    Any amount accessed through an equity release loan is typically used to pay off the existing mortgage before the balance is made available to the borrower.

    What Are the Options for Mortgage Holders?

    For mortgage holders who are considering equity release, there are two options, namely a Lifetime Mortgage and a Home Reversion plan.

    While each option offers unique opportunities to tap into a home’s value, their structures and implications vary, particularly for those with existing mortgages.

    Here’s a closer look:

    #1. How Does a Lifetime Mortgage Fit the Bill?

    A lifetime mortgage allows you to borrow a portion of your home’s value. 

    Interest accumulates and compounds on the amount borrowed, but nothing is repaid until you either die or move into long-term care. 

    Note

    If you opt for a lifetime mortgage that allows interest payments, you will be able to keep your total debt to a minimum by making regular payments.

    A lifetime mortgage can be a viable option for those with existing mortgages, depending on their age and property value.

    #2. Is Home Reversion the Way Forward?

    With home reversion, you sell a part or all of your property to a provider in return for a tax-free lump sum or ad hoc withdrawals, while retaining the right to live in the property. 

    Take note

    This is a less common approach for those with existing mortgages, owing to the complexities involved in part-ownership sales.

    Eligibility Criteria for Equity Release

    Eligibility criteria for equity release include specifications regarding property value, the borrower’s age, and the condition and location of the property.

    Equity release criteria in brief:

    • Age Requirements: You must be at least 55 years old to qualify for a lifetime mortgage, the most common form of equity release. For joint applications, both applicants must meet the minimum age requirement.
    • Property Requirements: The property must be located in the UK and be your main residence. It should also meet the lender’s minimum valuation criteria (usually £70,000). Certain property types, such as retirement homes, flats above commercial premises, or non-standard constructions, may have restrictions or be ineligible.
    • Existing Mortgage: You can still qualify if you have an outstanding mortgage, but it must be cleared as part of the equity release process. The available equity will be reduced by the amount needed to pay off the mortgage.
    • Additional Considerations: Some plans may require you to keep your property well-maintained or hold sufficient insurance coverage. Eligibility may also depend on the specific features of the equity release plan, such as drawdown facilities or interest repayment options.

    By meeting these criteria, homeowners can explore equity release options tailored to their circumstances, with professional advice guiding them through the process.

    Rules & Standards

    Ensuring that providers operate ethically and transparently is crucial to the modern equity release industry.

    Borrowers are protected by the FCA and the ERC:

    • FCA’s Role in Safeguarding Your Interests: The Financial Conduct Authority (FCA) regulates equity release providers and ensures they adhere to strict guidelines that protect consumers.²
    • Standards Set by the Equity Release Council: The Equity Release Council (ERC), a trade body for the industry, has set high standards to ensure that equity release products are safe and transparent for consumers.³

    Benefits of Equity Release With an Existing Mortgage

    The benefits of equity release with an existing mortgage include the obvious fact that you will be able to use your equity release funds to clear your mortgage debt.

    Let’s take a look at the advantages:

    • Mortgage Repayment: Allows you to clear your existing mortgage without needing monthly repayments (for lifetime mortgages).
    • Access to Additional Funds: After repaying the mortgage, any remaining equity can be used for other needs, such as home improvements or supplementing retirement income.
    • Flexible Repayment Options: Some plans offer partial repayments or interest-only options to manage the growth of the loan. (In fact, all new lifetime mortgage approved by the ERC now allow penalty-free partial repayments of up to 10% annually.)
    • No Negative Equity Guarantee: You’re protected from owing more than your property eventually sells, ensuring financial security for you and your family.
    • Stay in Your Home: Retain the right to live in your home for life or until you move into long-term care.

    What to Consider When Taking Out Equity Release With an Existing Mortgage

    When taking out equity release with an existing mortgage, there are a few points you should consider.

    These include:

    • Reduced Inheritance: The equity release loan, combined with accrued interest, reduces the value of your estate for beneficiaries.
    • Impact on Loan-to-Value (LTV): The outstanding mortgage reduces the available equity, which may limit the amount you can release.
    • Interest Accumulation: Compound interest grows the debt over time, especially if no repayments are made.
    • Costs & Fees: Equity release involves valuation fees, legal fees, and potential early repayment charges on the existing mortgage.
    • Eligibility Restrictions: Your age, property value, and remaining mortgage balance must meet the lender’s criteria.
    • Future Financial Flexibility: Releasing equity now may limit your ability to access further funds in the future.

    By weighing these considerations (and the benefits listed above), homeowners can make informed decisions about whether equity release is the right solution for managing their existing mortgage.

    How Does Your Current Mortgage Shape Your LTV?

    Your current mortgage affects your potential Loan-to-Value (LTV) ratio by determining how much equity you have in your property.

    Let’s break down how that works:

    • Home Equity: This is the portion of your home that you actually own outright, and it’s calculated by taking the current market value of your home and subtracting any outstanding mortgage balance. For example, if your home is worth £300,000 and you still owe £100,000 on your mortgage, your home equity is £200,000.
    • Impact of Existing Mortgage: The amount you still owe on your mortgage reduces your home equity. Using the example above, if you owe £100,000, your equity is £200,000, not the full £300,000 value of the home.
    • Loan-to-Value (LTV) Ratio: This ratio is used by lenders to determine how much they can lend you based on the value of your home. It’s calculated by dividing the loan amount by the current value of the property and multiplying by 100 to get a percentage. For example, if you want to borrow £150,000 and your home is worth £300,000, the LTV is 50%.
    • Equity Release Lenders: When you apply for equity release, lenders look at your available equity to decide how much they can lend you—i.e., what LTV they can offer you. A lower existing mortgage means you may have access to more equity (and therefore borrow more). Conversely, a higher mortgage balance means you own less equity in your home, which will limit the amount you can borrow.

    In essence

    The less you owe on your mortgage, the more equity you have in your home, and the better your equity release LTV ratio will be.

    And in simple terms

    The amount you can borrow through equity release is reduced by the remaining balance on your current mortgage.

    How Do Interest Rates Affect Equity Release?

    Interest rates play a crucial role in equity release as they directly impact the cost of borrowing and the growth of the loan balance over time.

    Here’s how rates affect equity release:

    • Loan Accumulation: Lifetime mortgage equity release plans involve compound interest. This means interest is charged on both the initial loan and accumulated interest over time. Higher interest rates accelerate the growth of the debt, reducing the remaining equity in your property more quickly.
    • Loan-to-Value (LTV) Ratios: Lower interest rates often allow lenders to offer higher LTV ratios, enabling you to access more cash from your home’s value. Conversely, higher rates may limit the amount you can borrow.
    • Product Options: Interest rates influence the range of equity release products available. Fixed rates provide certainty over the life of the loan, while variable rates might fluctuate, affecting long-term affordability.

    Understanding interest rates is therefore essential when choosing an equity release plan.

    Furthermore

    Comparing rates and repayment options can help minimise costs and preserve equity in your home.

    Steps to Take for Equity Release With an Existing Mortgage

    If you have decided to pursue equity release, there are certain steps to take.

    These include seeking professional advice, understanding the equity release process, choosing the right plan, settling your existing mortgage, and receiving the remaining funds.

    Let’s take a brief look at what these steps entail.

    Step 1: Seek Professional Advice

    Before proceeding, consult an independent financial adviser who specialises in equity release.

    They can assess your financial situation, explain how equity release works, and help determine if it’s the right option for you.

    An adviser will also ensure you explore alternative solutions that may better suit your needs.

    Step 2: Understand the Process

    Equity release typically begins with an assessment of your eligibility, which includes your age, property value, and the amount of your existing mortgage.

    Lenders will require a property valuation to determine how much equity you can release.

    This step helps establish how much will go towards clearing your mortgage and what will remain for other uses.

    Step 3: Choose the Right Plan

    Work with your adviser to select a suitable equity release product, such as a lifetime mortgage or home reversion plan.

    Compare interest rates, repayment options, and any additional features, such as partial repayment allowances or drawdown facilities, to tailor the plan to your circumstances.

    Step 4: Settle the Mortgage

    Once your equity release application is approved, part of the funds will automatically go towards repaying your existing mortgage.

    This step ensures the property is unencumbered, as most lenders require this condition to proceed.

    Step 5: Finalise and Receive Funds

    After the mortgage is cleared, the remaining equity is released to you.

    These funds can be used as you wish, whether to support your retirement, renovate your home, or cover unexpected expenses.

    Each step requires careful consideration, making professional guidance essential to ensure the process is smooth and meets your financial goals.

    Common Questions About Equity Release With an Existing Mortgage

    Are There Alternatives to Equity Release for Accessing Cash With an Existing Mortgage?

    How Will Equity Release With an Existing Mortgage Affect My Beneficiaries?

    Is It Possible to Move Homes After Taking Out Equity Release?

    Can I Repay My Equity Release Plan Early?

    How Do I Choose a Reliable Equity Release Provider in the UK?

    What if My Home Decreases in Value After I’ve Taken Out Equity Release?

    Final Thoughts on Equity Release With an Existing Mortgage

    Before deciding, it’s essential to consider the advantages, disadvantages, and alternatives to equity release with an existing mortgage. 

    Working with a financial advisor or specialist equity release broker can help you understand the implications and make an informed decision that meets your individual needs and financial goals. 

    With the correct information and guidance, you can unlock the value of your home and enjoy a more comfortable retirement.

    Equity release with an existing mortgage can be a complex financial decision—one that can also provide a valuable source of income in retirement. 

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