Equity Release or Remortgage: Which is Right For You?

People choose to remortgage their home when they are no longer satisfied with the mortgage deal they have, whether they have a problem with their mortgage lender or their specific type of mortgage.

By remortgaging, they can get a new deal, and often a new lender, which can improve their financial situation.

Remortgaging allows homeowners to stay in their current property, yet still benefit from a new deal. This is ideal for people who want to change their mortgage without moving house.

What is Equity Release?

Equity release also allows people to change their mortgage, but instead of keeping to a traditional mortgage, equity release consumers get a new mortgage with no obligatory monthly payments.

Again, people who pursue equity release do not need to move home, as they can access this different mortgage in their current property.

They do have to agree to be in long-term debt (though the money doesn’t have to be repaid), and sticking to the regulations of their equity release company.

There are two main equity release products, and each one works very differently. The lifetime mortgage is a type of mortgage that is not paid off until the homeowner passes away, and their home is sold.

The home reversion plan is a scheme that involves the homeowner selling some or all of their property, and living there rent-free with an equity loan.

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The Pros Of Remortgaging

Remortgaging is great for some people, and terrible for others. Before delving into what type of person would benefit from remortgaging, we are going to explain the general pros of this scheme.

1. You don’t have to move home

When you are struggling with your finances, it may be recommended that you downsize. This works for many people, but if you are not prepared to move out of your property, you would benefit from a scheme that allows you to stay in your home. Remortgaging does exactly that.

When you remortgage your property, you reserve your right to live in your home as the homeowner.

This means you can continue to enjoy the practicality of where you live (e.g., its proximity to work and family), and you do not have to go through the long, stressful process of finding a new home in the cost of living crisis.

2. You can borrow more funds

By remortgaging, you can borrow more money from the mortgage provider, which can help you with achieving certain financial goals.

For example, you could put the additional funds towards your private pension, education fees for your children or grandchildren, or paying off a debt.

This would prevent you from having to get the money elsewhere, which could be more expensive and more complicated.

3. You can reduce your monthly payments

If you have been paying your mortgage for a long time, your provider may be happy to reduce your monthly payments. This could leave you with much more money for important expenses such as bills, food, and transport.

4. You can reduce your interest

It is disappointing to pay lots of interest on your fixed mortgage when interest rates drop.

If you get in touch with your mortgage provider about remortgaging, they could adjust your interest rate to match the average interest rate on the market, saving you lots of money.

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The Cons Of Remortgaging

Though remortgaging can help you to reduce your outgoings, it is not always the best thing to do. Here are some potential disadvantages to remortgaging.

1. It can be expensive

It is never going to be cheap to remortgage your house, as you have to employ various professionals to complete the process. You will be encouraged to get a financial adviser, a solicitor, and a broker. Evidently, the main fee will be the money you pay to your mortgage lender.

As well as paying for the remortgage itself, you may have to pay to get out of your current deal. This is known as an early repayment fee. Speak to your mortgage provider about how much this would cost, as it is different for everyone.

2. You have to commit to monthly payments

This may seem redundant, as you are already making monthly payments on your current deal. However, you need to carefully consider how much your new monthly payments would be, and whether it would be affordable in relation to your income.

If you skip monthly payments, the consequences can be disastrous. You would most likely be taken to court by your lender, and you could end up having your home taken away (1).

3. It takes a while to complete

Some other methods of borrowing money are very quick, but remortgaging can take a while. Most of the time, you will be waiting up to two months until you get your new mortgage deal. If you need money quickly, this is not a suitable option.

4. You may not qualify for the scheme

Just because you were suitable for your lender when you first got your mortgage does not mean that you would be suitable for a remortgage. You will have to go through credit checks and income checks to confirm that you qualify for remortgaging.

If you are hoping to remortgage to get out of debt, it can be difficult to qualify, as the lender cannot always offer money with the knowledge that you have a history of missed payments.

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Who is Eligible For Remortgaging?

There are no set eligibility criteria for remortgaging, as it will depend on what your current mortgage looks like, the deal you are hoping to get, your income, your credit rating, and various other factors.

Sometimes, you can wait for a better time to remortgage, as your financial situation can change quickly. For example, if you have just applied for credit, or been made redundant, it would be sensible to wait a while before remortgaging.

However, if you have a very low income and a poor credit rating, it may be worth cutting your losses and pursuing an alternative to remortgaging, such as equity release.

How Much Does Remortgaging Cost?

As we have explained, there are fees involved with leaving your current deal, as well as getting your next deal. We will outline how much each step could cost, but please keep in mind that the prices will vary significantly.

We have already discussed the early repayment fee, which tends to be up to 5% of your outstanding mortgage balance. Evidently, this will be a very different cost depending on how much money is left on your mortgage.

Next is the deeds release fee, which covers the legal costs of remortgaging. It tends to be between £50-100, though some lenders charge much more.

The first cost involved with getting your new deal is likely to be advice fees. You pay an adviser to help you work out the pros and cons of remortgaging, and to get the ball rolling with the process. Often, they will charge a percentage of your mortgage balance, up to a maximum of 1%.

Next, you have to look at the arrangement fee. This is the money you pay to organise the remortgage, and it can be anything up to £4000, though it is often much less. This fee is paid directly to your mortgage lender.

If you are accepted for a remortgage, you will have to pay for a property valuation and conveyancing. Together, this costs up to £600, but it is sometimes included as part of the overall deal. You will pay this fee to a solicitor.

Finally, if you choose to get a mortgage broker to help you with the process, you may need to pay for their services. Brokers who do not offer free advice tend to charge up to a maximum of £500.

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How Long Does Remortgaging Take?

Remortgaging is not usually finalised until at least four weeks after the initial application is made. In many cases, this stretches to eight weeks or more.

You will not be able to predict exactly how long the process will be, but you can ask your lender for a general idea.

It is sensible to get prepared for remortgaging, so that you are not the reason for any delays. Seek advice as soon as possible, have a look at your credit score, and collect information about your mortgage, your property, and your income.

This will help your lender to get started with remortgaging as soon as they have approved the process.

How Does Remortgaging Impact Retirement?

If you are paying a lot for your mortgage, and you could be getting a better deal, it is wise to do something about this before retirement.

Your retirement years are sometimes the most precarious in terms of finances, so you should do all you can to establish financial security before you stop working.

If you manage to switch to a lower interest rate, reduce your monthly payments, or borrow more money, you could live comfortably in retirement as opposed to not being able to make ends meet.

Not only would this benefit you in your later years, but it could also impact your family in the long run, in terms of inheritance.

Having said that, it is not easy to remortgage in retirement. There is no guarantee that a lender will approve your application, as it is much harder to meet the eligibility criteria when you are not working.

You would have to prove that you have a steady income (e.g., a pension), and a good credit rating.

If you are not in a position to be able to afford remortgage fees, remortgaging could negatively affect your retirement. It is not always sensible to pay these fees at a time when your income is already going to change.

Please speak to a financial adviser before pursuing remortgaging before or during retirement.

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The Pros Of Equity Release

Below, we inform you of some of the advantage of equity release:

1. You don’t need a large income

If you want to release equity, you do not need to prove that you earn a certain amount of money. A stable income is often not a prerequisite for taking out equity with an established equity release lender.

This is hugely important for people who are in debt, but would still like to be able to make ends meet in retirement.

2. There are no monthly repayments

The reason for the lack of income discrimination is the fact that there are no monthly payments with equity release, unless you go after a repayment plan. You can budget for retirement without taking into account mortgage outgoings, which can help you to live a very comfortable lifestyle.

3. You can save money for your family

Most equity release products offer inheritance protection, so you can save some of your equity loan as inheritance.

Many people avoid equity release as they do not want all of their money to go to the equity release company when they die, but inheritance protection prevents this from happening.

4. You can avoid credit checks

Most equity release providers will not ask about your credit history, as they do not need to judge whether you would be able to meet repayment deadlines.

If you have a problem with debt, this is very reassuring, as it means you get a fresh start in spite of your previous issues with poor credit.

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The Cons Of Equity Release

Below, we inform you of some of the potential disadvantage of equity release:

1. There is compound interest

There has to be some sort of payoff for the equity release company when their clients aren’t making monthly payments, and this is compound interest. The longer you leave your equity loan to build up, the more the interest will grow. As it is compound interest, it can grow rapidly.

This is not always a problem, as you may not be concerned with the debt if you have a no negative equity guarantee. However, if this would worry you, equity release might not be right for you.

2. It can be difficult to move home

Unless you have downsizing protection, it can cost a lot of money to move home with equity release, as there is often an early repayment fee. If you want to avoid this fee, you can ask for a different property, but it might not be exactly what you are looking for.

3. You have to be a certain age

Equity release will not be possible if you are under 55 years old. This means that you may have to consider remortgaging if you need the money quickly.

4. It is a newer scheme

There are advantages to equity release being a newer scheme, but it also means it is harder to find information about it, and it could be easier to get involved with a scam. There are also likely to be fewer equity release advisers about, compared to remortgaging advisers.

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Who is Eligible For Equity Release?

You can take out equity if you own a property with a minimum value of £70,000, and you are over 55 years old.

Even if your credit rating is poor, your income is low, you live in a dangerous area, and you do not have any savings, you could still potentially qualify for equity release.

How Much Does Equity Release Cost?

You can find out about the costs of equity release here. In the short term, it isn’t a hugely expensive scheme, as the only obligatory fees are application fees, a one-off advice fee, legal fees, and administration fees.

However, unlike remortgaging, equity release costs a lot in the long run. You end up with a large amount of debt, unless you choose to pay the money back.

This is something to be wary of, although you should always remember that it is not dealt with in the same way as traditional debt, so you will not become bankrupt for not paying back your equity loan.

How Long Does Equity Release Take?

Most equity release loans are provided within eight weeks of the client making an application. However, just like remortgaging, delays can interrupt the process. The loan is likely to arrive more quickly if you seek equity release advice, as you will get tips on making the process as fast as possible.

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How Does Equity Release Impact Retirement?

Equity release could impact retirement in a positive or negative way, depending on each client’s specific circumstances.

This scheme is often wonderful for people who are approaching retirement, as they can get a large amount of money without having to wait a long time, qualify for a traditional loan, or promise to repay the money quickly.

Consequently, they get to spend their loan on things that improve their post-work life, such as holidays, cars, home renovations, and monthly bills. They can do all this without having to save some of their money for repayments.

There is also the promise that the client can stay in their home for as long as they want to, which provides a huge amount of stability in retirement.

No matter how much of the loan is used up, the homeowner will always be able to live in their home after taking out equity.

On the other hand, equity release could be detrimental for some people in retirement. One reason for this is that it could take away their means-tested state benefits.

Yet, if you look into this before releasing equity, you will be able to figure out whether the amount of money lost would be worth it when compared to the money gained through the equity loan.

Another drawback of equity release in retirement is that there are many different rules you have to follow, which may feel restrictive. These can include not being allowed to make repayments, not being able to rent out homes in your property, and not being able to get out of the scheme without paying to do so.

Finally, people with a large amount of savings in retirement may find equity release to be damaging, as it would involve compound interest payments.

If you do not need to access a large number of funds for retirement, you may be in a better situation if you avoid the debt and stick to your savings.

Please call our 24-Hour Helpline: 0330 058 1579

Equity Release or Remortgage: Which is Right For You?

We have given you a general idea on whether remortgaging or equity release would be right for you. The main things to consider are:

• Your income
• Your credit rating
• Your age
• The reason you need the money
• Your employment status
• Inheritance

If you get in touch with us on 0330 058 1579, we can advise you on which scheme is right for you. We will ask questions about all of the above topics to find out what the best solution would be in your situation.

If you are worried that we always promote equity release, don’t be. It would not benefit us to recommend equity release to customers who are inevitably going to regret it. We want to make sure you have a secure financial situation, and if this means recommending remortgaging, we are happy to do this.

Remortgaging is not the only alternative to equity release. To find out about other options, have a look at our article on the alternatives to the equity release scheme.

References

[1] What happens when your mortgage lender takes you to court https://www.citizensadvice.org.uk/debt-and-money/mortgage-problems-debt-and-money/what-happens-when-your-mortgage-lender-takes-you-to-court/#:~:text=If%20you%20are%20in%20mortgage,to%20you%20losing%20your%20home.