Choosing to pay off your mortgage early could be a great way to free up some monthly expenditure. Freeing up monthly expenditure can help to improve quality of life during retirement allowing homeowners to enjoy things such as holidays, life events and home improvements. One of the many ways to do this is to using equity release to pay off your mortgage. This Retirement Solutions Article looks at options and is meant for general guidance and not specific financial advice. We always suggest seeking independent legal and financial advice prior to making any decisions.
With the Bank of England’s base rate currently sitting at a high of 5.25% [1] and inflation 4.2%, homeowners and retirees will be looking at ways to optimise their retirement income. [2]
In terms of average retirement income, as of 2022, UK pensioners had an average weekly income of £349 after taxes and housing costs, amounting to approximately £18,148 annually. The retirement income varied regionally with pensioners in London typically earning less than the average. While those in Scotland or the North East had more. The majority of this income stems from private pensions, State Pension benefits, occupational pension schemes, and investments [3].
Furthermore, income inequality within retired households has remained stable but high, with disposable income inequality for these households at 30.8% in FYE 2021, marginally changing from FYE 2020. This highlights the persistent financial disparities among the retired population [4].
This article is for general guidance only and is not financial or professional advice. Data correct at the time of publishing, is subject to update and amendment periodically.
Can I pay off an existing mortgage with equity release?
In 2021, households in the 55-to-64-year-old age range had an average of £106,100 left to pay on their mortgages. [5]
A lifetime mortgage, which is the most popular form of equity release. Could be a way for eligible homeowners to release some of the cash tied up in their property.
With a lifetime mortgage, it is a requirement for homeowners to pay off their existing mortgage to release equity from their property.
Homeowners are not required to make monthly repayments with a lifetime mortgage. Instead, the interest is rolled up and is paid off with the loan when the last homeowner either dies or goes into long term care.
As of the 28th of March 2022,[6] those who take out a lifetime mortgage plan can make penalty free repayments on their plan as and when they please.
Pros of paying off your mortgage with equity release
- Fixed or capped interest rates for the lifetime of the loan
- The right to remain in your home without the worry of repossession
- Less or no monthly payments freeing up extra cash each month
Cons of paying off your mortgage with equity release
- The interest charged on a lifetime mortgage is typically higher than that of a traditional mortgage, there for the interest can build quickly on top of the value of the original loan.
- Equity release can affect any state benefits you’re entitled too.
- If you choose to repay all or part of the loan early there may be an Early Repayment Charge
How to use equity release to pay off a mortgage
Important to note
- A lifetime mortgage is a loan secured against your home and subject to compound interest, meaning the amount you owe can grow quickly
- Equity release will reduce the value of your estate
- You may be left with limited or no property equity remaining, following equity release
- Equity release may affect your entitlement to means-tested benefits
- Equity release will reduce your financial options in the future
Alternatives to a lifetime mortgage
Downsizing – Downsizing is the process in which homeowners sell their property and move into a smaller home. You could therefore move to a property with a lesser value with the idea of becoming mortgage free.
Mortgage extension – if it’s time to retire and you still haven’t paid off your mortgage, it may be possible for your lender to extend the term of your mortgage. Some Lenders may have an upper age restriction.
Re-mortgage – It may be possible to secure a new mortgage deal over your property which could potentially bring down the monthly payments. A mortgage adviser or your lender will be able to tell you more and advise whether this could be an option.
Things to consider with equity release
- The value of your estate will be reduced, due to the fact you are borrowing money from your estate, along with any interest that accrues.
- A lifetime mortgage is a loan secured against your property. This means the equity in your property will be reduced.
- Your state benefits may be impacted. Our independent advisers will be able to provide you with an independent report showing you the impact releasing equity will have on your state benefits.
If you are considering using equity release to pay off your mortgage early. You can use our lifetime mortgage calculator to get an estimate of how much tax-free cash you could potentially release from your property.
It is worthy of note, if the amount you can release is less than your outstanding mortgage. You may need to find a way to cover the difference as it is a requirement that anyone releasing equity from your home pays off any existing debt on their property.
Your Mortgage Lender can provide you with a mortgage statement if you are unsure of how much cash you may need to release. You can also check if there will be any charges for choosing to repay your mortgage early.
If you decide to proceed. Your funds will be sent directly to your mortgage lender with any remaining funds being transferred to you.
Speak with an independent equity release adviser
If you are considering equity release to pay off your existing mortgage. We would recommend speaking with an independent equity release adviser. You can rest assured that any plan recommended for you will be based upon your own personal objectives. And circumstances and researched from the whole of the market if you choose Retirement Solutions.
To book an appointment with one of our independent equity release advisers request a call back. You can also use our eligibility checker to see how much tax-free cash you could potentially unlock from your home.
“Think carefully before securing other debts against your home, you should be aware that you may be extending the terms of your debt and increasing the total amount that you repay.”
