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Equity Release with an Existing Mortgage in Jan 2022

Are you considering an equity release scheme, but do you have an existing mortgage?

Fear not, we’re here to help you discover how you can unlock your property value through an equity release plan, with an outstanding mortgage.

This article includes:

  • How equity release schemes work with an existing mortgage.
  • If equity release mortgage lenders will give you tax-free cash, if your home has a mortgage in place.
  • The difference between a standard mortgage and an equity release product.

Our EveryInvestor team has analysed the terms and conditions of all regulated plan providers to determine the rules surrounding equity release if you currently have a mortgage.

Here’s what we found!

What is Equity Release?

An equity release scheme is a financial product designed for older homeowners that allows you to unlock a percentage of the property value from your main residence, without monthly repayments being required in your lifetime. You can receive the money as a single lump sum, through a drawdown facility, or monthly salary.

The loan and compound interest rate are usually repaid to your equity release company from the sale of your home when you pass away or enter long-term care.

More information: What is Equity Release?

How Does it Work?

An equity release works by allowing you to access the value accumulated in your house as a tax-free1 lump sum. In addition, when you release equity, you can stay in your home for the rest of your life. The interest compounds and it’s generally paid off to your equity release company when the last borrower enters long-term care or passes away.

If you’re wondering if equity release is safe, a legitimate equity release provider will be protected by the Equity Release Council2 and Financial Conduct Authority (FCA).3

Interesting read: What’s the Equity Release Council?

reverse mortgage calculator (1)

Am I eligible for Equity Release Scheme with a Mortgage?

You are eligible to receive a cash lump sum from an equity release company if you only have a small existing mortgage left. You’ll first be required to use the cash you unlock to pay your outstanding loan, before keeping the balance. You’ll be required to seek financial advice to see if you qualify for a lifetime mortgage or home reversion scheme.

What Happens to My Mortgage When I Take Equity Release?

You will pay back your mortgage when you take out equity release. Whether you have a repayment mortgage or an interest-only loan, when it comes to equity release lenders, you will be required to pay it back. The equity release provider will take the first charge on your property after your equity release is completed, replacing your current mortgage lender.

You’ll need to provide the amount you owe to get a formal statement from equity release lenders. As part of the equity release process, your present mortgage lender will be contacted by an equity release solicitor to acquire a formal redemption statement.

What if I Can’t Cover My Outstanding Mortgage with Equity Release?

You must repay any existing mortgages in order to receive a product from an equity release lender. If you find yourself in a bind owing to a shortage, there are several alternative solutions available to you.

The maximum amount you can obtain when you release equity is calculated based on your property’s value and your age. You will be able to release up to 60% of your property’s value from the age of 55, with each birthday adding 5% more, until the age of 85 when it reaches a maximum of approximately 80%.

There are a few reasons why your outstanding mortgage may not be covered by the maximum equity release, including:

  • Interest-only mortgages – For the duration of your plan, you paid interest on a monthly basis. Even so, the capital balance remained throughout this time. The amount of cash required to repay may be greater than the proportion you can get out of your house.
  • Younger borrowers – If you have a mortgage and want to pay it off so that you can save money each month, we recommend opening an equity release plan. However, because you are in the lower end of the equity release age range, you may only reduce your property’s value by a smaller amount.

The first step may be to contact your current mortgage lender and ask if they will extend your term of payment. You may then reconsider equity release in a few years. Remember that the mortgage balance will not rise if you keep up with your payments. Still, the proportion of money you can take out of your house each year will improve, allowing you to make up for any shortfalls.

A medically enhanced lifetime mortgage equity release plan is one option that you should explore. Some lenders consider your health issues and various lifestyle choices when determining interest rates and loan amounts, and it’s possible under a medically enhanced plan to have a maximum release of 38.1 percent at age 55.

Do I Have to Pay Off My Secured Loan with Equity Release Schemes?

Yes, you’ll likely have to first pay off your secured loan because secured loan lenders are often unhappy with being a secondary charge to an equity release. This is due to the fact that the equity release lender will be the first charge and your balance will most likely rise (if you do not make monthly payments).

If you have no idea if you have secured borrowing or unsecured borrowing, HM Land Registry can tell you by looking at your property’s title deeds.

While it is not necessary to pay off unsecured debt as part of the procedure, it is very typical for clients to do so. Repaying debt that must be made on a regular basis allows you more money flow each month, and can be a huge benefit if you are having difficulties making your payments.

Each case is unique, however, so we recommend consulting an equity release advisor.


What Is the Difference between a Standard Residential Mortgage & Equity Release Lifetime Mortgages?

The main difference between a standard residential mortgage and a lifetime mortgage is that no monthly payments are required in your lifetime with the latter. Note that both are regulated by the financial conduct authority.

Here’s more information:

Residential MortgageLifetime Mortgage
100% property ownership.YesYes
The lender has a registered charge on your property.YesYes
Maximum loan amount.Usually 4.5% of a joint income (based on affordability).Depending on your age and property value.
Affordability assessment. YesNo
Mandatory monthly payments.YesNo
Voluntary payments.YesYes
Minimum age of applicants.Usually 18 years old.55 years old.
Maximum age of applicants.Typically up to age 75 (Usually be repaid by retirement).Lender dependent.
The right to live on your property for life. NoYes
Interest rates are fixed.For the initial term only (2/3/5/10 years). Reverting to the Standard Variable Rate after that if not re-fixed.Yes for the lifetime of your mortgage, rates are usually fixed.

How Much Equity Release Can I Take?

The amount of equity release that you can take will depend on your age, your property value, and the condition of your health.

Enter a few personal details into our FREE equity release calculator to discover how much cash you could be eligible to unlock!

What Additional Costs Should I Consider With Equity Release, Besides Paying Off My Mortgage?

In addition to your mortgage costs, you will also need to cover solicitor’s fees, financial advisory fees, and the fees from your lender.

Here’s more:

  • Any outstanding mortgage or secured loans – It’s important to contact your lender before speaking with an adviser in order to obtain redemption figures. This information will enable the advisor to provide you with the most accurate quotations possible. To determine what you owe, run a free credit check.
  • Solicitor’s fees – A solicitor will be required for your equity release application. If you have a regular solicitor, it would be wise to check with them about equity release and get a price range. Alternatively, your advisor can give you an estimate of the cost as well as advise you on where to seek help from.
  • Advice fees – You’ll need to find out how much your financial advisor is charging you for setting up your plan.
  • Lender fees – Some lenders request an arrangement fee, which is charged after your equity release has been completed. A valuation fee may also be incurred if you choose a particular plan. These are generally paid up front and non-refundable.

Learn more: Equity Release Costs in Jan 2022


I Already Have an Equity Release Lifetime Mortgage; Can I Borrow More?

You might be able to borrow more if you have an existing lifetime mortgage equity release if there is still equity available in your property.

With lifetime mortgages, you can either:

  • Drawdown more funds, if they’re still available in your drawdown facility.
  • Unlock additional cash from your equity release lender.
  • Review your equity release plan and replace it with a new one to unlock more cash. You will need to pay new valuation fees.

Interesting read: The Current Most Popular Alternatives to Equity

Introducing Junior ISAs

In Conclusion

Taking equity release is a fantastic way to pay off your existing mortgage, with 22% of people usually using equity release for this purpose. You must get in touch with a whole market financial adviser who will guide you through the entire equity release journey.

Use our FREE lifetime mortgage calculator to see how much you could receive by releasing equity from your property.

How Much Can You Release?

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Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
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