By Tom Philips at September 1, 2022

Remortgaging Or Equity Release: Which is Best?

If you are looking for a way to boost your income before you retire or after you have retired, there are many different routes you could take. Two of the most popular are equity release and remortgaging.

Each option comes with its own pros and cons, and we will explain these in detail today to help you decide which one is best for you.

Without further ado, let’s tackle the question you’re all waiting for. Remortgaging or equity release: which is best?

What is Equity Release & How Does it Work?

To begin with, let’s explain what equity release is and how it works. There are two main types of equity release product, and these are home reversions and lifetime mortgages. With either one of these schemes, you can access a loan secured against your home if you qualify.

Monthly repayments are never necessary (unless you are on an interest only scheme), as the debt is only repaid when you pass away or move into long-term care and the equity release lender sells your home.

With a lifetime mortgage, this process is usually longer, as the equity release consumer remains the homeowner. However, this is not the case with a home reversion, so the house sale is usually finalised within a week, meaning the family have to move the possessions out of the home very quickly.

What Are the Advantages Of Equity Release?

Not everyone will benefit from equity release, and not everyone even qualifies in the first place, so the following advantages only apply to a certain group of people.

Firstly, if you are looking to release equity, it is likely that you do not have many savings as you are searching for a way to increase your income in retirement.

Many people in this situation are stuck as they do not qualify for a traditional loan (which comes with income checks and credit checks), and though they may have valuable property, their cash does not reflect this.

However, with equity release, there are usually no income checks or credit checks, so homeowners who are low-income can still access a large amount of money to help them in their later years.

What’s more, they do not have to accept the fact that they are cash poor with valuable property, as they are offered the opportunity to tap into the cash in their home and improve their income.

Secondly, you can use equity release as a way of purchasing a second home, which would ordinarily be very expensive and time-consuming. With a second home plan or a buy-to-let plan, you can release money from your property and use it to purchase another one, either for personal use or to rent out to tenants.

Again, this makes it possible for people with a reduced income to make the most of their retirement without having to worry about money. If you select the buy-to-let arrangement, you can even earn a consistent income for the rest of your life.

What Are the Disadvantages Of Equity Release?

Firstly, as we mentioned above, not everyone is eligible for an equity release loan, so we cannot pretend that this is a scheme that can help anyone.

To qualify for an equity release loan, you must meet certain conditions such as being at least 55 years old, being a homeowner, having a property that is worth at least £70,000, and not having an existing mortgage.

Some alternatives to equity release are more accessible to the general public as they do not require you to meet this criteria.

For example, anyone can choose to budget better in retirement, to downsize, or to return to work. Having said that, not everyone is open to this as it may involve more stress than equity release does.

Secondly, taking out equity means you are borrowing money from funds that would have been passed down to your family, so you may not be able to leave as much inheritance.

This is a problem for people who want to make sure their family are looked after when they pass away.

However, some people find that there is a pressing need for them to have an increased income, so they don’t mind if the consequence of this is passing on a reduced inheritance. Others are not close to their family, and so they don’t feel an obligation or desire to leave as much money as possible.

You can learn more about the potential disadvantages of equity release here.

Who Qualifies For Equity Release?

As we have stated, to qualify for equity release, you must be a homeowner aged at least 55 years old with a house or apartment worth £70,000 or more.

The equity release lender’s criteria will be explained to you before you sign up to a scheme, as the criteria varies according to the provider you go with.

There are some misconceptions about who qualifies for equity release. To clear these up, you can take out equity if you are still working, if you have a bad credit rating, and if you do not have the money to pay for the equity release fees (as you can use your loan to fund this).

What is Remortgaging & How Does it Work?

When a homeowner remortgages their house, they change their mortgage deal, either by switching to a new scheme provided by their mortgage lender, or by moving to a new mortgage lender.

This works for anyone who has an existing mortgage and is concerned about repaying this in order to release equity. Remortgaging your home may give you the opportunity to reduce your monthly payments and interest rates.

What Are the Advantages Of Remortgaging?

One huge advantage of remortgaging is that property prices are rising in most areas of the UK, so there is every chance that your loan-to-value ratio has decreased as you will not need to borrow as much money. This means that you will be entitled to lower mortgage rates than when you first took out a mortgage.

Next, by remortgaging, you could access a more flexible mortgage, which would allow you to be less strict with money in your retirement.

For example, you could select a mortgage scheme that allows you to take payment holidays, which would give you a break when you need to pay for larger expenses i.e. holidays, a new car, or education fees (1).

Another advantage of remortgaging is that if the current interest rate on your mortgage is variable, remortgaging would allow you to move to a scheme with a fixed interest rate.

This is particularly advisable at the moment as the cost of living is rapidly increasing, and you may not be able to trust that you can always keep up with the interest rate of your mortgage.

Finally, if you remortgage your house, you could change the conditions of your mortgage term according to your situation (2).

For example, if you need a longer amount of time to pay your mortgage, you could ask for an extension. If you want to repay early to switch to a new scheme, you could ask for a shorter term.

What Are the Disadvantages Of Remortgaging?

Firstly, there is no guarantee that your loan-to-value ratio will increase, as house prices may fall unexpectedly, and this would mean you could end up paying back more than you have borrowed.

This is known as negative equity. This can also be the case if your credit rating worsens after you remortgage your home (3).

Secondly, you have to be confident that you will be able to make the payments when you remortgage. If you cannot afford the monthly payments, your property could be repossessed (4).

This is a significant disadvantage compared to equity release, which does not involve repayments and therefore does not lead to the repossession of the homeowner’s property.

Finally, you usually have to wait a certain period of time before you are allowed to remortgage your house, so you may be stuck for a while if you recently took out a mortgage.

On the other hand, with equity release, the only requirement is that you repay your existing mortgage, so there is more flexibility in this respect.

Who Qualifies For Remortgaging?

In order to be able to remortgage your house, you will have to prove that you earn above a certain threshold. This also applies if you are self-employed, but the process will be slightly more complicated and there is less chance you will qualify.

For self-employed people, you will usually need to provide evidence of your income through tax returns and business accounts.

Another key factor is your credit rating. Lenders will check your credit report to check that you can be trusted to make repayments, and you can even check the report yourself to see how reliably you have paid off things like loans, credit cards, and mortgages over the years.

Next, the mortgage lender needs to approve your loan-to-value ratio. The lower the ratio, the less risk there will be for the lender, so they are likely to offer lower interest rates.

You could potentially get a lower loan-to-value ratio by finding ways to get a higher valuation figure, but this isn’t always possible.

Equity Release Vs Remortgaging: Which is More Costly?

The answer to this question depends on how you view equity release. On one hand, equity release may be more expensive than remortgaging as you borrow a large loan, and if you do not repay the loan or the interest at all, you will end up owing a huge amount at the end of the scheme.

What’s more, there are separate costs involved with equity release such as application fees, advice fees, and legal fees.

However, given that equity release loans do not involve monthly repayments (and remortgaging does), you are technically paying out less when you choose to release equity, as it is not your responsibility to deal with your debt.

There are also fees involved with remortgaging, so though you may borrow less overall, you still need to consider the normal fees that come with taking out a mortgage, such as legal fees and valuation fees.

Equity Release Vs Remortgaging: Which is Quicker?

Generally, taking out equity is much quicker than remortgaging. From start to finish, equity release takes around 8 weeks, whereas remortgaging takes around 14 weeks.

This is of course dependent on the personal circumstances of the homeowner, as well as any delays that may occur along the way with either scheme.

Equity Release Vs Remortgaging: Which is Easier?

This is a very subjective question, so we cannot tell you which will be easier for you until you get in touch with us and explain your current financial situation and your hopes for the future.

Equity Release Vs Remortgaging: Which is Better For Paying Off Debts?

You can pay off debts with either of these two schemes. However, equity release may be better for paying off debt as you do not need to save up your income to afford monthly repayments, so you can pay off all your debt at once and still have enough money left to enjoy your retirement.

Equity Release Vs Remortgaging: Which is Better For People in their Later Life?

Again, we cannot answer this until we get to know your personal situation. Remortgaging is better for people who can afford monthly repayments, and whose current mortgage is not offering them as much as it could be.

However, equity release is better for people who cannot afford regular payments, and who want access to a larger sum of money that is secured against their home.