Can I Use Equity Release to Pay Off an Existing Mortgage?

The answer to this question is yes.

In fact, it’s mandatory to pay off all secured debt as part of the equity release process. The equity release lender will replace your existing mortgage lender as the sole first charge on the property.

During the equity release process, your existing mortgage will therefore be paid off. This rule applies to both repayment mortgages and interest-only mortgages.

If there’s any surplus of cash after the existing mortgage has been paid off, this amount will be paid into your bank account.

When you apply for equity release, your equity release solicitor will ask your existing lender for a redemption statement. This just states how much you owe on your current mortgage.

The equity release solicitor will repay the amount owed during the application process. You don’t even have to do anything. It’s taken care for you.

Would I Have Enough Money to Repay an Existing Mortgage?

We cannot tell you whether you would have enough money to repay an existing mortgage until you get in touch with us and provide details about your current mortgage, your property value, and your financial situation in general.

What we can say is that repaying debts is the most common use of an equity loan in the UK, and repaying a mortgage is a popular example of this.

This means many equity-release consumers receive a loan that is high enough to help them repay their existing mortgage.

An equity release adviser will help you to calculate how much it would cost to repay your mortgage, and whether your estimated loan amount would cover this.

The advisor will ask:

The amount of mortgage debt you are in
The length of your mortgage term
The type of mortgage you have
The interest rate on the mortgage
Any early repayment fees that your lender will charge.

Speaking of early repayment charges, you are looking at around 1 to 5% of the outstanding mortgage, depending on the regulations of the mortgage lender that you are with (3).

It may be possible for you to pay less if you took out your mortgage a long time ago.

To give an example, if you had £100,000 left on your 25-year repayment mortgage with an interest rate of 3.5%, with £10,000 early repayment fees, you would have to put £551 per month towards repayment. The lump sum cost would be £165,263.

Is it Possible to Repay an Existing Mortgage With Equity Release?

Yes, many homeowners decide to repay their existing mortgage using their equity loan. This is only possible for people with enough equity in their homes.

If you bought your property a long time ago, it is very likely that this will apply to you, as property prices have been rising and therefore equity will have built up in your home.

When considering whether your loan would cover the cost of repaying your mortgage, remember to keep early repayment fees in mind. These tend to be 1-5% of the remaining amount of money that needs to be repaid.

If you took out your mortgage very recently, it may not be possible for you to use equity release to repay it, as there will be too much money left over on the loan.

However, first-time buyers are very unlikely to pursue equity release in the first place, as you must be at least 55 years old to get involved with this scheme.

What happens if I am not able to fully cover the existing mortgage with equity release?

As we stated in the introduction to this article, it’s absolutely vital that all secured debt is paid for an equity release application to proceed. If equity release does not cover the full amount of your existing secured debt (i.e. your existing mortgage), then there are a few options open to you.

The amount of equity you can release depends on your age and the value of your home. For instance, a 55-year-old may only be able to release 25% of the value of their home, compared to 60% for a person aged 85+. Thus, one option is to wait until you are a few years older when you make your application to release equity from your home. But this would mean you need to extend the term of your existing mortgage.

It’s also possible to apply for a medically enhanced equity release. Here, the equity release lender will consider your state of health, and may agree to increase the amount of money to you because of these health factors.

Currently, you are able to release up to a maximum of 38.1% even at age 55 if you suffer from certain health conditions.

Lastly, if you are facing a limited shortfall in funds to pay off an existing mortgage, it may be beneficial to take out unsecured debt, or even ask a family member to cover the shortfall.

Will Some Equity Release Lenders Reject My Application If I Have an Existing Mortgage?

It is worth mentioning that not every equity release lender is willing to offer a loan to someone with an existing mortgage, particularly if your property is leasehold.

However, by speaking to an equity release adviser, you can find a lender who would be willing to enrol you on one of their plans.

You can do this by calling us on 0330 058 1579 and asking us about our free consultation for people who are interested in equity release.

Most equity release lenders need to know that your mortgage is going to be repaid so that you can be transferred to an equity release lifetime mortgage.

However, it is usually possible to do this after you have taken out equity, so do not worry that you will be disqualified by every lender if you have not yet paid off your conventional mortgage.

Pros of Repaying an Existing Mortgage With Equity Release

Given that so many people release equity as a way of paying off their existing mortgage, it goes without saying that there are many pros to doing this. Here are just a few examples.

1. You can release a large amount of money

There are not many schemes available that offer you as much money as equity release does. If you have a high-value property and you’re in your 70s or 80s, you could release a huge amount of money that could completely change the way you live in retirement.

Even if you are only 55 years old and your property just about reaches the minimum requirement in terms of value, you could still release a significant amount of funds to put towards repaying your mortgage.

2. The loan does not have to be repaid

Many customers are drawn to equity release because the loan does not have to be repaid, unlike most other loans that you take out.

This means that the stress of repaying a set amount of money each month is taken away, as the equity loan would replace the previous monthly payments you were making on your mortgage.

3. You will have more money to spend on things you enjoy

Equity release gives you the opportunity to repay your mortgage and therefore be without monthly payments for the rest of your life.

This means that all of your money can be put towards things you enjoy or things you have always wanted to achieve.

For example, without having to put money aside each month for the mortgage, you may be able to purchase a luxury holiday or a brand-new car.

You would not have to worry about getting into irreversible debt, as the equity release funds would only ever be repaid after you passed away.

4. You can take out a lump sum

When you reply to equity release, you are able to state whether you would prefer to take out a lump sum or have regular payments into your bank account.

There are even schemes specifically designed for lump sums, such as the lump sum lifetime mortgage.

This means that it couldn’t be easier to get your hands on a large sum of money that would be enough to repay the rest of your mortgage. The same cannot be said for every loan, as some of them only allow you to receive monthly payments.

5. The funds are free from tax

Equity release funds are always completely free from tax, including capital gains tax and income tax.

This means that equity release is a great way to repay your mortgage as you will have access to more money to do so, rather than having to give up a significant percentage of this money for tax.

6. Your income will not hinder you

If you are struggling to repay your conventional mortgage on your own, the chances are that you do not have a huge income.

This can become a frustrating cycle, given that many traditional loan providers are not willing to lend money to someone who is on a low income, as they worry that the money would not be able to be repaid.

This is especially true for pensioners, who cannot rely on regular work as a source of income.

On the other hand, your income does not hinder you with equity release. Many equity release consumers are on a low income, but they happen to have a high-value home that they can use as a way of qualifying for a secured loan.

For equity release loan will be secured against your property, so there is no reason to prove that you have a certain income to receive a loan from an equity release provider.

What’s more, as there will be no repayments (unless you opt for this), the equity release lender does not have to cheque that you would be able to afford to repay a set amount of money each month.

If you are stuck in a rut with your income, you may even be able to use equity release other way of earning an income.

You would do this by opting for a buy-to-let lifetime mortgage, which would allow you to buy a property that you can rent out to tenants and collect a rental income from.

However, you would need a large loan to be able to do this, particularly if you needed to put money aside to repay your existing mortgage. Get in touch with one of our advisors to find out if you could have enough money to repay your mortgage as well as buying a second property.

7. Your credit rating will not hinder you

Just as having a low income will not limit you when it comes to equity release, having a poor credit rating is not a significant issue for equity release lenders.

Again, repayments are not a part of equity release, so there is no reason for the equity release lender to refuse alone on the basis of you not being reliable in the past with regard to repayments on loans.

It is true that having a great credit rating can benefit you with equity release. You may be entitled to lower interest rates or higher loan. However, this is simply a bonus, and people with a bad credit history will not be punished in terms of receiving a meagre loan.

Cons of Repaying an Existing Mortgage With Equity Release

We have outlined why it can be a great idea to use equity release to pay off an existing mortgage.

However, there can be some downsides to doing this, and we want to be honest with you about why this is not always the best solution.

1. You will get into debt

Some people do not consider an equity loan as debt because there is no deadline to repay it. In fact, in most cases, customers are not expected to repay any of the money while they are still alive.

However, you are getting into debt when you release equity, regardless of the fact that repayments are not obligatory. This is because you are borrowing money that will need to be paid back through the sale of your home when you enter long-term care or pass away.

2. You are making a big commitment

If you decide to use equity release to repay your existing mortgage, once the mortgage is repaid, you may think that you are finished with the scheme as you have achieved what you set out to achieve.

However, equity release should not be used as a means of bridging finance. There are much better ways to loan money for a short-term purpose.

Equity release is designed for long-term goals, so once you get started with the scheme, it can be quite tricky to back out of it.

Some pretty release lenders will charge an early repayment fee if you want to exit the scheme early, so you may regret using your equity loan to repay your existing mortgage when this financial penalty is applied.

This does depend on the amount of money you have released. If you were fortunate enough to take out enough money to pay off your mortgage and be left with a significant amount of funds, this may not be an issue for you.

3. Your inheritance funds will decrease

Finally, if you use equity release as a means of affording to repay your mortgage, it will decrease the amount of inheritance you can pass on to your family.

The payoff of not having to make monthly repayments is that money will be taken from your house sale and given to the equity release lender, instead of all of the money going to your beneficiaries.

You will have to think about whether it is worth it to pay off your mortgage with equity release based on how much inheritance you want to pass on to your loved ones.

You will still be able to reserve some money for them, but the amount will be lower than it would have been if you did not take out an equity loan.

4. You may not have enough money to repay your mortgage

We may talk about the benefits of repaying your mortgage with an equity loan, but the truth is that many people will not release enough money to cover the cost of their mortgage.

You would have to carefully consider how much money you would be entitled to before choosing to take out equity, otherwise you could end up in a situation where you are in debt with equity release as well as with your conventional mortgage.

If you seek counsel from an equity release adviser who is a member of the Equity Release Council, this should not happen, as they will not allow you to apply for an equity loan if they do not believe that you would end up with enough money to repay your mortgage.

5. The interest will roll up

Finally, when you take out equity to repay your mortgage, you should not only consider the cost of the loan, but also the interest that will be added to it.

Though interest rates are low with equity loans, the interest is compounded each year, so you could end up in a lot of debt if you do not make repayments on the interest.

This may be preferable to being in debt with a conventional mortgage as it allows you to enjoy your retirement without paying back money each month.

However, this is down to personal opinion, as some people are not willing to get into so much debt with interest and reduce the amount of money that their family can inherit, as well as potentially reducing their budget for later life care.

Getting Advice From an Equity Release Broker On Paying Off an Existing Mortgage

We have already recommended that you speak to an equity release specialist about whether you should use equity release to pay off your existing mortgage.

However, in addition to this, we would recommend booking an appointment with an equity release broker.

The broker will analyse your finances and help you to decide whether it is valuable for you to repay your mortgage using equity release funds.

They will also be able to find the best equity release lender for you, which may include lenders who offer larger loans than normal all lower interest rates than average.

Make sure you shop around to find the right equity release broker for you. It is important that they are willing to be honest about equity release, rather than recommending this scheme to you when an alternative would suit you better.

What Happens If I Want to Keep My Existing Mortgage?

If you are interested in releasing equity but you do not want to repay your existing mortgage, you will have a decision to make.

It is not possible to take out equity without either being mortgage-free or arranging to repay your mortgage with the equity release funds.

If you end up deciding to take out equity, you must keep in mind that there are consequences that do not apply to have a conventional mortgage.

We have already outlined that it can impact your inheritance, but we recommend looking at our article on the disadvantages of equity release to get a better idea of how it can be detrimental to some people.

Equally, spend time thinking about what your life would look like if you continued to pay your conventional mortgage.

Would you be able to afford the rising cost of living while you are still paying for your mortgage each month?

Would your retirement pan out how you would like it to without having access to equity release funds?

There is no right answer, which is why it is so important to speak to an equity release adviser and ask them to talk you through the pros and cons of equity release versus a traditional mortgage.

If you know anyone personally who has taken out equity, we would also advise you to speak to them, as you will get a better idea of how equity release works on an individual level.

Finally, it is always wise to speak to your family about your decision, as they hopefully have your best interests at heart and will be and will be honest with you about which option they believe is best for you.

Of course, at the end of the day, the most important thing is that you are happy with your decision. We encourage you to spend some time researching the equity release scheme in order to eventually come to a decision about whether you should use it as a way of repaying your existing mortgage.

Is There Another Way I Can Pay Off My Existing Mortgage?

If you do not believe that equity release is right for you, there are other ways that you can pay off your existing mortgage. Here are some ideas.

1. Use your pension

Most people are eligible for a state pension once they reach state pension age. On top of this, some people have saved money in a private pension to prepare for retirement.

If you have enough money in your pension, you could use some of this to repay your mortgage. However, we would only recommend doing this if you would have enough money left over to enjoy your retirement.

It is also worth noting that you will not be able to access your pension until you reach state pension age, so this will not be a possibility for everyone.

What’s more, some people are not entitled to the full state pension due to employment gaps, and not everybody has money in a private pension, so this may not be a viable option for you.

If you have employment gaps and you would like to make voluntary contributions for National Insurance, you may be able to increase your pension by doing this.

2. Use your savings

Again, not everybody has savings, and if they do, they might not have enough to fund the repayment of their mortgage.

However, if you are fortunate enough to have the money, what better to spend it on than repaying your mortgage and escaping monthly payments in retirement?

If you are still working, there is still time to save, so you could start to budget better with the intention of saving money to repay your mortgage.

Have a look at our blog post on how to survive the cost of living crisis if you are concerned about budgeting at a time when your bills are becoming more expensive.

3. Borrow from loved ones

Finally, if you have any loved ones who are able to lend you money, you could take this route as a way to pay off your existing mortgage. Most people would not be able to lend enough money to cover the costs of the remainder of your mortgage, but it is an option worth looking at.

Can I Pay Off Other Debts With an Equity Loan?

Yes, you can use equity release to pay off all sorts of debts, not just a conventional mortgage.

If you choose to pay off a debt with your equity loan, please remember that you will still be in debt due to borrowing money from an equity release lender.

However, because you will not be expected to repay this money, it will not be the same as being in debt in the traditional sense.

Contact Us For Help With Paying Off Your Existing Mortgage

At Equity Release Warehouse, we have successfully advised many customers on the equity release scheme. As the majority of homeowners use equity release to pay off debts, we are very familiar with this concept.

If you are looking to release equity to pay off your existing mortgage, we will ask all the right questions to ensure you understand how equity release would affect your finances and whether it would be worth it to take out equity rather than to pursue an alternative.

The main questions we will ask will revolve around your current mortgage.

We will need to know the type of mortgage you have (repayment or interest-only), the length of your mortgage term, the interest rate on your mortgage, and the remaining amount of money that needs to be paid on your mortgage.

The answers you give us will determine how much money you need to repay your mortgage. Once we know this, we can calculate how much money you could release by obtaining an equity loan.

We do this by asking your age, your property value, and the type of property you own. It is more likely that you will release enough money to pay off your existing mortgage if you are over 80 and your property is extremely valuable.

Having said that, younger homeowners with high-value properties or older homeowners with low-value properties may also be able to release a sufficient amount of funds to cover their mortgage repayment costs.

If we do not believe that you would be able to release enough money to pay off your mortgage, we will be honest about this.

You would then be able to either research alternatives for repayment, or decide to combine equity release funds with a different source of income in order to repay your existing mortgage.

If you are reading this article and you want to release equity for a reason other than paying off your mortgage, we can also help you with this.

Many people take out equity to renovate their home for retirement, to purchase family holidays, to gift money to relatives, and for many other reasons.

If you fill out our callback form, we will be able to contact you with more information about equity release.

As long as you are eligible for the scheme, we do not mind what you are spending the money on, and which plan you are interested in enrolling on.

Having said that, we are happy to give advice on which equity release plans may be best for you, as well as ideas on what you could spend your money on.

Again, this only applies if you qualify for an equity loan. The primary qualifiers are being 55 years old or more, being a homeowner, and having a property that is worth at least £70,000.

References

[1] How much equity can I release? https://www.sunlife.co.uk/equity-release/equity-release-calculator/how-much-equity-can-i-release/