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Should you ever use an equity release loan towards your mortgage?

Find out the pros and cons of this approach

Homeowners are drawing larger sums of money from their homes using equity release, and around one-fifth of these are planning to pay down their mortgage, new research has found. But what are the potential pitfalls?

On average, equity release will give homeowners £77,934, up from £70,625 the year before, research from Key Retirement shows. While 63% of people planned to use the money for home or garden improvements, 22% planned to pay off their mortgage.

Equity release allows you to borrow against the value of your home, and make minimal or no repayments during your lifetime. When you die or go into care, the loan and any interest is repaid from the sale of the property. But this debt can rapidly grow.

Find out how equity release works, as well as the risks involved in this strategy.


What is equity release?

If you’re over the age of 55, equity release can allow you to access cash tied up in your home. The money can usually be taken lump sum or drawn down in several smaller payments.

There are two types of equity release: lifetime mortgages and home reversion.

With a lifetime mortgage, you borrow a proportion of your home’s value and interest is charged on that amount. This interest is generally ‘rolled up’ into the debt, meaning you don’t usually have to pay anything back until you pass away or sell your home.

Home reversion allows you to sell a share of your property to a provider for less than its market value.

When you pass away or move into long-term care, the provider gets their share when the property is sold. So, for example, if you sold 35% of your property to a provider, the provider will be repaid 35% of the final sale price.

With either approach, the amount of debt you owe may increase rapidly. So you should think carefully and seek professional advice before making any decisions.


Should I use equity release to pay off my mortgage?

Using equity release to pay off your mortgage can reduce your monthly payments or even bring them to zero.

If you’re older, you may struggle to be approved for a remortgage deal from your bank. Equity release may provide an alternative for slashing your payments, as well as help you access a tidy lump sum or regular withdrawals.

But keep in mind that equity-release schemes are designed to be a lifelong commitment and can seriously limit your options if you ever change your mind, need to move or want to use your equity for something else.

With an equity-release plan, the amount of debt you owe can rapidly increase over time, meaning the value you own in your home is quickly eroded.

Most policies have a ‘no negative-equity’ clause, meaning you’ll never owe more than your home’s value. But if you’re hoping to leave property to the next generation, equity release could eat into their inheritance.

How much will equity release cost me?

The graph below shows how much you’ll owe over 25 years after releasing £75,000 in equity through a lifetime mortgage and home reversion.

Based on a £250,000 property, you can see how your equity release debt could grow over time, dramatically reducing the the equity you have left.

In this example, releasing £75,000 means that you could relinquish up to 70% of your property’s value.

This may not be suitable if you’re hoping to pass on your property, or the full value of your property, to your relatives.

Equity release can work in some financial situations but it’s always worth considering alternatives first before committing a portion of your home’s value.

For this reason, it’s important to always seek professional advice before choosing equity release.

Alternatives to equity release

There are a few alternatives to equity release that might be more suitable depending of your financial circumstances.

Unsecured personal loan

An unsecured personal loan could be a cheaper option if the amount you want to borrow is small and you can keep up with repayments.

But you shouldn’t use an unsecured personal loan to pay off your mortgage, as the interest you’ll face is likely to be much higher than your mortgage interest rate.

Mortgage extension

If you haven’t paid off your mortgage by the time you retire, it might be possible for your lender to extend the term of your mortgage for another five or 10 years.

Keep in mind, though, that some lenders may have an upper age restriction of 65 years.

Remortgaging

If you speak to your lender, or a mortgage broker, you may be able to secure a new mortgage deal over your property, which can bring down your monthly payments.

As an example, you may be able to move to a deal with a lower loan-to-value ratio, or one where interest-rates are lower.

This may not be possible in all cases, however, as lenders may be reluctant to offer a new mortgage deal to applicants who are older or retired.

Downsizing

If you need to release a significant amount of cash, selling your home and moving somewhere smaller could put more money in your pocket.

It’s important to consider the cost of selling a house, though, as you will need to factor in things like agent fees, removal costs and stamp duty costs.

Speaking to a mortgage broker can help you figure out the best mortgage product if you’re looking to remortgage or move house.

  • While Which? Mortgage Advisers cannot provide advice on equity release loans, their experts can discuss alternative options and give you impartial, expert advice on remortgaging or downsizing to a smaller home. Call 0800 197 8461 or complete the form below for a free call back.

This is a lifetime mortgage. To understand the features and risks, ask for a personalised illustration.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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