EQUITY RELEASE GUIDE
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Still working out whether an existing mortgage prevents equity release? Read our guide to equity release with an existing mortgage.
Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits and your tax position.
Can you use equity release to repay a mortgage?
A lifetime mortgage can potentially be used to repay an existing mortgage, subject to eligibility, the amount available and the terms of the lifetime mortgage.
If you proceed, your existing mortgage would normally need to be repaid as part of the arrangement. This means some or all of the money released from your home may be used to clear the outstanding mortgage rather than being available for other purposes.
Existing mortgage
You have an outstanding mortgage secured against your home.
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Lifetime mortgage arranged
If an adviser determines that a lifetime mortgage is suitable for your circumstances, and an appropriate product is available, it may be arranged against your property.
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Existing mortgage repaid
Part of the money released is used to repay the existing mortgage.
The amount left over depends on how much is released
For example, if the amount available through a lifetime mortgage is greater than your existing mortgage balance, there may be money remaining after the mortgage has been repaid. If the amount available is not sufficient to repay the existing mortgage, a lifetime mortgage may not be able to proceed on that basis.
How much may be available will depend on factors such as your age, property value and the criteria of the lifetime mortgage. An adviser can explain the options that may be available based on your circumstances.
What happens to your monthly mortgage payments?
If your existing mortgage is repaid using a lifetime mortgage, the repayment structure will usually be different from a conventional residential mortgage.
With many lifetime mortgages, you do not have to make regular monthly repayments. Instead, interest can be added to the loan and the amount owed can increase over time. Some products also allow you to make voluntary repayments or pay some or all of the interest.
Existing mortgage
TYPICAL REPAYMENT STRUCTURE
Regular monthly payments
With a conventional repayment mortgage, monthly payments generally cover capital and interest. With an interest-only mortgage, monthly payments generally cover the interest while the capital remains outstanding.
The exact arrangement depends on your existing mortgage.
Lifetime mortgage
TYPICAL REPAYMENT STRUCTURE
Regular monthly repayments may not be required
Interest can usually be added to the loan instead, meaning the outstanding balance can increase over time.
Some lifetime mortgages allow voluntary repayments or interest payments, subject to the product terms.
If interest is added, the amount owed can grow
When interest is added to a lifetime mortgage rather than paid, future interest is calculated on an increasing balance. Over a long period, this can significantly increase the amount that eventually needs to be repaid.
AMOUNT BORROWED
+
INTEREST ADDED OVER TIME
=
INCREASING LOAN BALANCE
You can see an illustration of how lifetime mortgage interest can build up in our guide to equity release costs and fees.
How much of the equity release would be used to repay your mortgage?
If you have an existing mortgage, the amount outstanding is important because it will normally need to be repaid as part of arranging a lifetime mortgage.
This means the amount released and the amount available to you afterwards can be two different figures.
TOTAL AMOUNT RELEASED
The amount provided by the lifetime mortgage
−
EXISTING MORTGAGE REPAID
The outstanding mortgage that needs to be cleared
=
AMOUNT REMAINING
Any money remaining after the existing mortgage has been repaid
The existing mortgage balance can make a significant difference
If a large proportion of the amount available is needed to repay your existing mortgage, there may be relatively little remaining for other purposes. In some circumstances, the amount available may not be sufficient to repay the existing mortgage in full.
The amount potentially available through a lifetime mortgage will depend on factors including your age, property value and the product criteria.
Consider how much you actually need
If your objective is simply to repay an existing mortgage, it may be worth considering whether other ways of repaying or restructuring that borrowing are available before taking additional borrowing against your home.
What are the costs and longer-term implications?
Repaying an existing mortgage with a lifetime mortgage changes the way the borrowing works, but it does not remove the cost of borrowing.
The interest, fees and effect on the equity remaining in your home should therefore be considered alongside any change to your monthly repayments.
Interest can build up
If interest is added to a lifetime mortgage rather than paid, the outstanding balance can increase over time.
Other costs may apply
Depending on the arrangement, there may also be advice, legal, valuation or other costs to consider.
Less property equity may remain
As the amount owed increases, the proportion of your property’s value remaining as equity may be reduced.
Your estate may be affected
Using equity from your home and allowing interest to build up can reduce the value of the estate ultimately available to beneficiaries.
Compare the longer-term position, not just the monthly payment
A lifetime mortgage may have a different repayment structure from your existing mortgage. When comparing the options, consider the potential total cost over time, how the outstanding balance may change and the effect on the equity remaining in your home.
What alternatives should you consider?
If your main objective is to repay an existing mortgage, equity release is not necessarily the only option. Depending on your circumstances, there may be other ways to repay, replace or reduce the borrowing.
The options available can depend on factors such as your income, age, mortgage balance, property and wider financial position.
Another mortgage
A conventional or later-life mortgage may potentially allow the existing borrowing to be replaced, subject to affordability, eligibility and the terms available.
Using savings or other assets
Existing savings, investments or other available money might potentially be used to repay or reduce the mortgage, although the wider financial implications should be considered.
Downsizing
Selling your current home and moving to a less expensive property could potentially release money that can be used to repay the mortgage.
Family arrangements
In some circumstances, financial support or another arrangement involving family members may be worth exploring, with appropriate consideration of the financial, legal and tax implications.
Compare the options on more than one factor
There may be more than one way to achieve the same objective. Understanding the different options can help inform your discussion with an adviser.
Questions to consider before using equity release to repay a mortgage
Before deciding how to deal with an existing mortgage in later life, it can be useful to consider both your immediate objective and how the decision could affect your finances in the future.
How much is outstanding on your existing mortgage?
When does your existing mortgage need to be repaid?
Could you afford to continue making mortgage payments?
Could the mortgage be repaid or restructured another way?
How much could potentially be available through equity release?
Would you need additional money after repaying the mortgage?
How important is preserving equity or inheritance?
How could your circumstances change in the future?
Think about the position after the existing mortgage has been repaid
Repaying the current mortgage is only one part of the decision. It is also worth considering the potential cost of the new borrowing, the equity that may remain in your home and whether the arrangement would continue to meet your needs if your circumstances change.
Our guides can also help you understand how much equity may be available and the potential costs of a lifetime mortgage.
Frequently asked questions
Common questions about using equity release to repay an existing mortgage.
Can I use equity release to pay off my mortgage?
Do I have to pay off my existing mortgage when taking equity release?
What if the equity release is not enough to repay my mortgage?
Will I have money left after paying off my mortgage?
Will my monthly mortgage payments stop?
What happens to the interest on a lifetime mortgage?
Can I make repayments on a lifetime mortgage?
Is equity release the only way to repay a mortgage in later life?
What happens to the equity left in my home?
What should I consider before using equity release to repay a mortgage?
Continue exploring equity release
Alternatives to equity release
Explore other ways you may be able to achieve your financial objective.
Read the guide →
Equity release costs & fees
Understand interest, fees and how borrowing can change over time.
Read the guide →
Is equity release right for me?
Explore the questions worth considering before speaking to an adviser.
Read the guide →
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Equity release will reduce the value of your estate and may affect your entitlement to means-tested benefits and your tax position.
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