Have you been wondering, “Can I use equity release to pay off my mortgage?“

According to a recent report by The Telegraph, one in six first-time buyers who took out a mortgage in December 2022 will still be paying off that loan into retirement.¹

Are you facing the same outlook? Could equity release be an option if you do not want to keep making mortgage payments when you are in later life?

The team at EveryInvestor has researched the equity release market to present the pros and cons of these products and put together this guide on whether it may be worth it to use your property value to clear your mortgage.

Find out now if repaying your mortgage in this way could work for you.

What Is Exactly Equity Release?

Equity release is a financial concept designed for those 55 and older, enabling them to access the value locked in their home’s equity.

It is ideal for those who need cash without wanting to sell their home.

This approach includes lifetime mortgages, where homeowners borrow against their home, and home reversion plans, where they sell a part of their property, both with deferred repayment terms.

Releasing home equity for improvements can be a strategic financial move, enabling homeowners to enhance the comfort and value of their residence.

Can I Use Equity Release to Pay Off My Mortgage?

Yes, you can use equity release to pay off your mortgage; many people choose this option to clear their existing mortgage debt, thereby reducing their monthly outgoings and potentially freeing up income for other uses in retirement.

This strategy not only simplifies your finances by consolidating debt but also potentially reduces your monthly outgoings, providing a more relaxed and comfortable retirement.

However, it is important to consider that equity release does mean decreasing your property’s net worth. We recommend seeking expert financial advice to fully understand the implications.

For instance, it could affect your ability to leave a substantial inheritance or even your eligibility for certain benefits. It is about making an informed decision that fits your individual circumstances.

Are UK Retirees Still Paying Off Mortgages in 2024?

Yes, UK retirees are still paying off mortgages in 2024, contrary to the traditional expectation of being mortgage-free in retirement.

The prevalence of this financial obligation among the UK’s retired population is highlighted by a poll conducted by LV= in 2022, which indicates that approximately 1.5mln retired homeowners were still making mortgage payments at that time.²

Why is this happening?

Factors such as rising property prices, longer mortgage terms, interest-only mortgages, and evolving retirement aspirations may contribute to the presence of mortgage debt among UK retirees.

Should I Pay Off My Mortgage Early?

Whether you should pay off your mortgage early depends on your individual circumstances, so it’s best to consider factors such as interest rates, financial goals, tax implications, and long-term housing plans. 

Factors to consider include…

• Whether you have more expensive debts to pay off first.
• Whether you are saving into a pension scheme.
• Whether your family would be provided for if you pass away.
• Whether you would be better off saving your money.⁴
• How much you may be charged in fees or penalties for repaying your mortgage early.⁵

Consult with a financial advisor or broker to assess the impact on your overall financial picture and make an informed decision.

Factors to Consider Before Making a Decision

Factors to consider before making a decision about using equity release to pay off your mortgage include eligibility, the financial implications, the long-term impact, your alternative options, and seeking professional advice.

More information…

• Eligibility: Determine if you meet the eligibility criteria for equity release, which typically includes being a homeowner above a certain age (usually 55 or older). However, there are additional criteria you may need to consider.
• Financial implications: Make sure you understand the interest rates, fees, and potential impact on inheritance. 
• Long-term impact: Consider the long-term impact on your finances and lifestyle, as accessing equity from your home reduces the value of your estate and may affect your eligibility for means-tested benefits. You also need to consider if you will need the equity release funds in the future.
• Alternative options: Explore other ways to repay your mortgage. These could include renegotiating mortgage terms, making additional repayments, or downsizing.
• Professional advice: Seek advice from an independent financial advisor or broker who specialises in equity release to ensure you understand the process, risks, and potential alternatives.

How Equity Release Can Help You Repay Your Mortgage Early

Equity release can help you pay off your mortgage early by giving you access to some of the equity in your home in the form of a lump sum. 

This lump sum could then be used to repay your mortgage.

Consider…

Equity release could be one way to address mortgage debt and potentially reduce financial strain by eliminating your monthly mortgage payments; however, you will need to discuss the potential risks and drawbacks with an equity release advisor.

How Does Equity Release Work to Repay a Mortgage?

Equity release to repay a mortgage works according to a step-by-step process. 

Below are the steps to follow:

• Assessment: First, you need to seek independent financial advice to assess your eligibility, discuss available options, and evaluate the suitability of equity release for your circumstances.
• Application and valuation: If equity release is right for you, you can apply for the selected plan, and the provider will send a surveyor to conduct a valuation of your property to determine its current market value.
• Approval and mortgage repayment: If your equity release mortgage is approved, the released funds will immediately be used to pay off your existing mortgage, effectively removing the mortgage debt and leaving you with the equity release loan. This will then become the new financial obligation secured against the property.
• Equity release loan: The balance of your equity release loan amount will be released either as a large lump sum or as a smaller lump sum (with the rest placed in a drawdown facility for you to access when you wish). 

The loan is typically repaid only upon your passing or when you move into long-term care, unless you decide on voluntary repayments.

How Long Does It Take to Repay Your Mortgage Using Equity Release?

It can take up to three months to repay your mortgage using equity release, depending on how long the equity release application process takes.⁶ 

Once your application has been approved, your solicitor can repay your existing mortgage in full with a single legal transaction.

The duration of this process will depend on how complex your situation is.

What If You Do Not Have Enough Equity to Repay Your Mortgage?

If you do not have enough equity to repay your mortgage, you will not qualify for equity release.

Repaying your existing mortgage is a requirement for anyone taking out equity release because your equity release lender will insist on having the sole charge over your property.

Pros and Cons of Repaying Your Mortgage Early

The pros and cons of repaying your mortgage early include significant interest savings and increased financial freedom as advantages, while potential early repayment penalties and reduced liquidity are notable drawbacks.

A look at what you need to know…

Advantages

The advantages of repaying your mortgage early using equity release include freeing yourself from monthly mortgage payments.

A quick look at some more benefits…

• Eradicating interest payments: By repaying your mortgage early, you will no longer need to worry about your monthly mortgage payments.
• Achieving financial freedom: Being mortgage-free can provide a sense of financial security and freedom. If you do not have a mortgage payment, you will have more money to put toward other aims, like saving for retirement, travelling, or investing.
• Increasing your home equity: By repaying your mortgage early, you will build home equity faster. That being said, if you choose equity release, you will actually reduce the equity in your estate.

Disadvantages

The disadvantages of repaying your mortgage early using equity release include the impact on inheritance and means-tested benefits.

Some drawbacks you will need to consider…

• Opportunity cost: When you use a significant portion of your savings or property equity to repay your mortgage early, you miss out on potential investment opportunities that could yield higher returns. If the interest rate on your mortgage is relatively low, you may be able to invest your extra funds in other assets, such as stocks or mutual funds, which could generate higher long-term growth.
• Effect on benefits: Taking out equity release to repay your mortgage could make you ineligible for certain means-tested benefits. 
• Effect on inheritance: Equity release will reduce the inheritance you are able to leave to your heirs.
• Overall cost: Equity release is a relatively expensive way to borrow money.
• Limited opportunity for investment diversification: By allocating a significant amount of your property value towards early mortgage repayment, you may miss out on diversifying your investments across different asset classes at a later stage in life.

It is important to consult an equity release broker or advisor about these pros and cons.

Are There Alternative Ways to Repay a Mortgage?

Yes, there are alternative ways to repay a mortgage, which include overpayments to reduce the term, switching to a different mortgage plan, or using investment returns or lump sum payments to clear the debt sooner.

Options include…

• Making overpayments to pay off the mortgage faster.
• Remortgaging to a loan with better terms, possibly with lower interest rates, to save money and pay off your mortgage faster.
• Renting out spare rooms to provide additional income to help repay your mortgage faster.
• Selling your property and buying a cheaper one can free up cash to repay your mortgage.
• Taking a payment holiday (offered by some lenders), can help if your are struggling with repayments in the short term, but it will extend the mortgage term.
• Extending your mortgage term to lower your monthly payments (though this option will make you pay more in interest over the long run).
• Getting an offset mortgage reduces the amount of interest you pay by combining your savings and mortgage, thereby offsetting the balance of your savings against your mortgage debt.
• Using savings or investments if that is an option.
• Seeking help from family if they may be willing to provide a loan or gift to help repay your mortgage.

Please note that it is always best to seek advice from a financial advisor before making any decisions regarding your mortgage, as different options may be more or less suitable depending on individual circumstances.

Common Questions

Conclusion

If you are over 55 and aiming for mortgage-free homeownership in the UK, equity release could be an option to explore.

It is crucial to evaluate the risks, compare different providers, and seek independent financial advice to ensure the best outcome for your circumstances. 

Understanding these factors will help you make an informed decision about using equity release to pay off your mortgage.