You Can Use Equity Release to Pay Off a Mortgage, But Is It The Right Option?

If you’re still paying off your home as you enter your retirement years, you will no doubt be looking for ways to clear your mortgage as quickly as possible.

Can I Use Equity Release to Pay Off My Mortgage?

If you take out an equity release loan with an outstanding mortgage, you must use the money to repay the mortgage in full. You won't receive your equity release money until it has been used to clear your mortgage by your solicitor.

You are allowed to use equity release to pay off your mortgage, providing it pays off the total debt and not just part of your mortgage.

Equity release is one solution – read on to find out more.

Looking for other information on Equity Release? This guide has info on 'Can you use equity release to pay off mortgage?' We have also writen extensively about:

• - Can equity release be paid back?
• - Can equity release be transferred to another property?
• - Can you be refused equity release?
• - Can equity release be repaid before death?

We update all our guides regularly. If you are researching Equity Release and we haven't got an exact guide that helps you, keep coming back as we update daily.

Using Equity Release to Pay Off Your Mortgage

Equity release lets you use the equity tied up in your property to claim a lump sum, or a drawdown fund, that can help you in retirement. Some customers may be put off by this if they haven’t yet finished paying off their mortgage, thinking it makes them ineligible, but that’s not the case.

With most lenders, you will be able to take equity release on the condition that, following the completion of your loan, your mortgage will then be paid off in full. So, as long as your equity release covers more than the outstanding balance you need to clear your mortgage, you have a good chance of being accepted.

Of course, this means that you’ll actually receive less of the money you’re given in the loan to spend yourself, but that’s not usually the prime reason for taking equity release when in these circumstances.

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Equity Release: Balancing the Budget

A large percentage of people who take equity release do so in order to pay off their debts, including their mortgage. And that’s primarily because, as you get older and you think about retirement, your regular income stream is likely to decrease.

No matter how good your pension is, for most people they will see a dip in earnings when they do stop working full-time. And as people are living for longer, the average person has more years to think about when they plan their budget. You need enough money to pay the bills, buy food and cover any other essentials before you start thinking about properly enjoying retirement with holidays or other hobbies.

And that is where equity release can help. By turning the value of your property that you’ve already paid off into a loan, you can end your monthly mortgage repayments which will likely be one of the largest outgoings you have.

With equity release, you don’t make any repayments immediately. Instead, this is all deferred until you either move into full-time care or you pass away. Then, the loan and any accumulated interest is repaid from your estate, usually with the sale of your home to cover it.

This lets you enjoy your money while you’re able to, at the cost of passing on less inheritance to your loved ones, without having to sell your home and move out.

Equity Release: Stats on Equity Release and Mortgages

• The average lump-sum payment made for lifetime mortgages in the most recent data period was £95,857 - Equity Council report
• The average lump-sum payment made for drawdown mortgages was £62,800, leaving £36,473 left as a reserve facility - Equity Council report
• Of those who borrow, around 22% of people stated that the reason for taking equity release was to pay off debts including mortgages - Which report

These figures give you an idea of just how much you could claim from an equity release loan, and how many people are using them in order to clear the debt. The older you are when you claim equity release, the higher a payment you could receive, so in order to get the most value, you should defer it as long as possible.

However, if you need the financial burden of mortgage payments to end sooner then you can start looking at equity release as an option from the moment you turn 55 (or if you live with a partner when the youngest of you turns 55).

What this confirms is that borrowing just to bring down the total amount you owe doesn’t make sense. The interest rate for equity release will always be higher than a mortgage. So, if you need to free up funds and you’re eligible to re-mortgage your property, it will be more financially prudent long-term to do so.

However, that’s not the point of equity release. If you still want or need a lump sum, but you can’t afford to then make monthly repayments, equity release gives you that option. It lets you take that lump sum upfront, and not worry about making payments from your monthly budget.

Yet, since you won’t be making repayments, that interest figure is also potentially misleading, since you won’t be paying anything off. So, you’ll always be paying an average of 4.91% on a higher value. These are all factors you need to consider when you speak to your financial adviser on the best solution for you.

Refinancing Your Property on Low-Interest Rates

It is no secret that base rates in the UK, and indeed around the world, have been near their historic lows for the last ten years. The coronavirus pandemic has decimated areas of the UK economy, and it will likely be some time before interest rates are back to their “normal” levels. As a consequence, when looking at equity release, there is every chance that the current rates available are extremely competitive compared to those on any outstanding mortgage.

Therefore you could be refinancing your mortgage at significantly reduced rates. There may be some restrictions with regards to age, income, etc. but if you are considering any form of equity release, it is very important to take financial advice.

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No Need for Mortgage Affordability Test

The UK mortgage industry has seen a number of new regulations brought in since the US mortgage crisis of 2008. One of these new regulations revolves around mortgage affordability tests which check to see if a homeowner can afford a particular mortgage arrangement based on their income.

This relates to mortgage arrangement where there is a monthly repayment from the homeowner. When looking at equity release plans where interest on the capital raised is simply rolled up and repaid with the capital when you move into full-time care, or pass away, there is no need for such a test. This is very important for many homeowners.

Paying Off Higher Rate Debts

As a side note, if you’re able to secure equity release from your property and after repaying your mortgage you have capital available, it may be worth looking at any relatively high rate debts you have.

For example, personal loans and credit cards can often attract interest rates in double digits compared to single-digit interest on equity release. So, rather than continue with monthly payments on your high rate debts it may be sensible to partially/fully repay these with low-cost finance.

Alternatives to Paying Off Your Mortgage With Equity Release

If you need to pay off your mortgage sooner, but you don’t want to choose equity release and build up interest to be taken from your estate, there are options but they could be limited. The most straightforward option is to sell your home and downsize, using the different in sale price and purchase of a cheaper property to clear the remaining mortgage.

If you can’t bear to leave your home but repayments are difficult to afford, you should exhaust any savings pot or potentially borrow from loved ones if that’s an option, and your pension annuity could also include a lump sum payment to help clear it.

However, for most people who don’t have a large income and are worried about repaying a mortgage, but who want to stay in their home, a lifetime mortgage could be the ideal solution.

Is a Home Reversion Plan an Alternative to Equity Release?

Those looking to release equity in their property and pay off their mortgage may well be drawn to a home reversion plan. In simple terms, you sell part of your property to an independent third party but remain rent-free in the property until you either move into full-time care or pass away.

At that point, your property would be sold, and the home reversion company would receive their share of proceeds. While this all sounds very interesting so far, there is one major issue to take into consideration.

When the home reversion company value your property, they will only pay between 10% and 50% of the market rate. This is because the property is not income earning during the time you are living at home, and they may need to wait for 10, 20, 30 or more years to cash in their investment.

So, if you had a property worth £200,000 and were looking to sell a 50% stake, you would receive between £10,000 and £50,000. This despite that on the open market, a 50% share of your property would be worth £100,000. It is important to take advice regarding home reversion plans which are becoming more popular, and more competitive, but there are still issues to be aware of.

Financial Advice and Repaying Your Mortgage

As part of any equity release application you’ll be required to speak to a financial advisor. Without formal advice, no reputable lender will offer you an equity release loan. So, you can use this as an opportunity to explore the options available to you in your unique personal circumstances.

Your mortgage advisor can also help – if they can’t provide you with a more affordable deal then they may recommend you choose equity release anyway.

In that meeting with your financial advisor, they’ll look at your mortgage and other rates you could get to help, as well as exploring all aspects of your financial health – other debts you may be repaying, benefits you’re entitled to and whether you’re claiming them, and the value of any savings or assets.

Their responsibility is to then present you with multiple options, and not steer you down one set path. So you’ll be clear on what the best option is for you.

In Summary

If you’re approaching retirement, and you want to take more control of your monthly budget by getting rid of your mortgage repayments then equity release could be the ideal solution, but it will depend on your circumstances.

Read through our extensive guides on equity release to learn more about how it works.

Quick Equity Release FAQs

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How Can Money Savings Advice Help You With Releasing Equity?

Here at Money Savings Advice, we have partnered with some of the UK’s leading Equity Release brokers. They have already helped thousands of people get the best Equity Release deal and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.