Are you considering equity release to pay off your mortgage?

Equity release allows homeowners to use the equity from their homes to pay off their mortgage with minimal or no repayments.

If you’re feeling unsure about whether this is for you, then you’ve come to the right place. 

With the cost of living increasing by an average of 13% in the last year¹, paying off a mortgage is the last thing you want to add to your list of worries.

Equity release can be a great idea, especially if you don’t have mounting debt.

But should you use it to pay off a mortgage?

Keep reading to find out more…

Why It’s Beneficial to Pay Your Mortgage Off Early

It’s important to pay your mortgage early to avoid any issues with defaulting on your monthly payments. 

When you pay your mortgage early, you save on the interest you’d have to pay back monthly. 

Life can be unpredictable, so aiming to be as debt free as possible frees up money elsewhere.  

Using Equity Release to Pay Off Your Mortgage

Using equity release to pay off your mortgage can be an attractive option for homeowners aged 55 and above who want to free themselves from monthly repayments and reduce their financial stress during retirement.

This approach involves unlocking a portion of your property’s value through an equity release plan, such as a lifetime mortgage or home reversion scheme, to settle your existing mortgage balance.

How to Use Equity Release to Pay Off a Mortgage 

Using equity release to pay off a mortgage is relatively simple.

The process of using equity release to pay off your mortgage involves several key steps.

Here’s how it works:

1. Initial Consultation with a Financial Adviser: You’ll start by consulting a qualified financial adviser who specialises in equity release. They will assess your financial situation, discuss your goals, and explain how equity release works.
   The adviser will also evaluate your eligibility, including your age (usually 55+), the value of your property, and the amount remaining on your existing mortgage.
2. Valuation of Your Property: An independent property valuation is conducted to determine your home’s current market value. The amount of equity you can release depends on this valuation, your age, and the type of equity release product you choose.
3. Choosing the Right Equity Release Plan: You’ll work with your adviser to select the most suitable product, such as a lifetime mortgage or home reversion plan. The adviser will also review features like inheritance protection and early repayment options.
4. Application Submission: Once you’ve chosen a plan, your adviser will help you submit an application to your selected equity release provider. The provider will verify your financial situation and property eligibility.
5. Offer and Acceptance: If your application is approved, the provider will issue a formal equity release offer. You’ll review this with your adviser to ensure you understand the terms, including interest rates, fees, and repayment conditions.
6. Paying Off Your Existing Mortgage: The funds are released, either as a lump sum or in instalments (depending on the product). Your existing mortgage is paid off in full using the released equity. This ensures that your home is mortgage-free, freeing you from monthly repayments.
7. Ongoing Management: With a lifetime mortgage, no monthly repayments are required unless you choose to make voluntary payments to manage interest accrual. For home reversion plans, no repayments are required, but you’ll need to maintain the property to the agreed standard.
8. Loan Repayment: The loan is repaid when your home is sold, usually when you pass away or move into long-term care. If you’ve taken steps like inheritance protection, part of your property’s value can be safeguarded for your heirs.

This process can take a few weeks to complete, and professional guidance is crucial to ensure it aligns with your financial goals and future plans.

Many equity release products offer features such as portability (the option to transfer the plan to a new property) and interest repayment options.

It’s essential to work with a provider that adheres to the standards of the Equity Release Council to ensure consumer protections like the No Negative Equity Guarantee.

Advantages of Using Equity Release to Pay Off Your Mortgage 

The advantages of using equity to pay off your mortgage include reducing your debt with no monthly repayments. 

Benefits include:

• Eliminates Monthly Mortgage Payments: Once your existing mortgage is paid off using equity release, you are no longer required to make monthly repayments, freeing up income for other expenses.
• Access to Tax-Free Funds: The funds released through equity release are tax-free, providing a financial boost without incurring additional tax liabilities.
• Stay in Your Home: With most equity release plans, particularly lifetime mortgages, you can remain in your home for as long as you wish, with full ownership retained.
• Flexible Financial Options: Equity release funds can be taken as a lump sum, a drawdown facility, or a combination of both, allowing you to tailor the plan to suit your financial needs.
• No Affordability Checks: Unlike traditional remortgaging, equity release does not involve income or affordability checks, making it an accessible option for retirees with limited income.
• Fixed Interest Rates: Most equity release products offer fixed interest rates for the life of the loan, providing clarity and protection against market fluctuations.
• Inheritance Protection Options: Many modern equity release plans allow you to safeguard a portion of your property’s value for inheritance purposes, ensuring your beneficiaries still receive a share.
• No Negative Equity Guarantee: Providers who are members of the Equity Release Council offer a No Negative Equity guarantee, ensuring that you or your estate will never owe more than the property sells for.
• Consolidates Debts: By using equity release to pay off your mortgage, you can simplify your financial situation by consolidating your debts into a single loan.
• Portability: Many equity release plans offer portability, allowing you to transfer the plan to a new primary residence if you decide to move, provided the new property meets the provider’s criteria.

By eliminating the burden of mortgage repayments and providing financial flexibility, equity release can be an effective solution for older homeowners looking to improve their retirement lifestyle.

Drawbacks to Using Equity Release to Repay Your Mortgage

The drawbacks to using equity release to repay your mortgage include increased debt, early repayment fees, and having a reduced inheritance to leave your family.

Risks and disadvantages include:

• Accumulation of Compound Interest: With most equity release plans, such as lifetime mortgages, interest compounds over time. This can significantly increase the total amount owed, reducing the equity left in your home.
• Reduced Inheritance: Releasing equity reduces the value of your estate, which can leave less for your beneficiaries. This may be a concern if you wish to leave a financial legacy.
• High Setup Costs: Equity release involves substantial upfront costs, including valuation fees, legal fees, and adviser charges, which can make it an expensive option initially.
• Impact on State Benefits: Receiving a lump sum or drawdown from equity release can affect eligibility for means-tested state benefits such as Pension Credit or Council Tax Reduction.
• Long-Term Financial Commitment: Equity release is a lifetime financial commitment. The loan is only repaid when you pass away or move into long-term care, limiting financial flexibility if your circumstances change.
• Early Repayment Charges: If you choose to repay the equity release loan early, you may face significant early repayment charges, which can be costly.
• Property Eligibility Restrictions: Not all properties qualify for equity release. For example, homes in poor repair or non-standard constructions may be ineligible, limiting your options.
• Loss of Flexibility in Borrowing: Once equity release is in place, securing additional borrowing against your property may be difficult or impossible, restricting access to further funds.
• Portability Limitations: While many plans offer portability, the new property must meet the lender’s criteria. This can limit your ability to move or downsize in the future.

Understanding these drawbacks is essential before deciding to use equity release to repay your mortgage.

Consulting a qualified financial adviser can help ensure the decision aligns with your long-term goals.

You Can Pay Off Your Mortgage Early 

If you pay off your mortgage early, you significantly reduce the interest you’re paying. 

Paying off your mortgage early also reduces your debt and is excellent if you have a high-interest mortgage. 

You Can Use the Money to Pay Debts or Take a Holiday 

After you’ve paid your mortgage, and all costs relating to the equity release process, you can use the remaining funds. 

Repay debts, renovate your home or take a holiday–whatever you need.

You Still Own Your Home

With a lifetime mortgage, you own and will still benefit from the property market increase. 

Unlike a home reversion plan, you maintain ownership and will still benefit from future increases in your property’s value.

The best part?

Not only do you keep your house, but you’ll live a stress-free life. 

Without the burden of monthly payments, never having to lose your home if you miss a  payment and retire in a place you love.

You Don’t Have to Make Any Monthly Repayments

You don’t have to make any monthly repayments except in exceptional cases. 

However, there are exceptions if you want to repay the loan early. 

You can discuss this with an equity release advisor.

Disadvantages of Using Equity Release to Pay Off Your Mortgage 

The disadvantages of using equity release to pay off your mortgage include increased debt, early repayment fees, and having a reduced inheritance to leave your family.

However, these will vary depending on your plan. 

Keep reading to find out what other disadvantages are linked to equity release.

You’ll Have Increasing Debt Due to Compound Interest 

Equity release uses compound interest, and with a lifetime mortgage, your estate will pay the loan and interest that accumulates over time.

There’s a Limited Amount of Cash That You Will Be Able to Release

There is only a limited amount of cash that you will be able to release. 

Most equity release lenders will give you between 20% and 60% of the market value of your property³.

There Are Fees for Early Repayment 

When you take out equity release, don’t forget that there are early repayment fees should you decide to pay your loan off early.

This often hovers around 10% of the initial amount⁴.

Fees vary between lenders but there will be a limit on what percentage you can repay each year.

It’ll Affect Your Access to State Benefits 

Your access to state benefits may be affected by the equity release cash in your account. 

 Your opportunity to benefit from the state pension or health care will be affected.

Always consult a financial advisor. 

You’ll Have a Reduced Inheritance to Leave Your Family 

When you release equity from your home, you’re essentially selling your home and the rights you have to it. 

When the home sells, your family won’t benefit from the sale of the house.

How Long You’ll Wait to Clear Your Mortgage Using Equity Release

You’ll have to wait up to 3 months² to clear your mortgage, depending on your situation.

Your solicitor will close your mortgage once the equity release process is complete.

Equity Release and Community Development

Equity release institutions play a vital role in community development by providing the necessary funding for essential services and infrastructure projects.

Through strategic partnerships with charitable organizations, these institutions leverage their financial resources to create lasting positive change in communities.

Common Questions

In Conclusion

Equity release is an excellent option to pay off your mortgage early if your existing debt isn’t.

If you’re considering taking out an equity release, use our equity release calculator below to get an idea of how much cash you can access. 

Once you know how much equity you can release from your property, educate yourself on the ins and outs of equity release.

Never make decisions without consulting your financial advisor so that you can find the best equity release plan to pay off your mortgage.