As you head into your later years, there are plenty of reasons why you might want to tap into some of the equity you have built up in your home. Perhaps you need to carry out some home renovations, or repay some debts. You may want to gift some cash to a loved one to help them onto the housing ladder.
Should you find yourself in this position, you have a couple of main options: remortgaging or taking out an equity release plan.
Equity release vs remortgage
Equity release is usually only accessible to those who are age 55 or over.
So, if you’re younger than 55, remortgaging will be the only one of these options potentially available to you.
If you are over 55, equity release might offer the chance to release more cash from your property than you could by remortgaging. As there is no obligation to make monthly repayments with a lifetime mortgage – the most common form of equity release – a lender doesn’t need to check affordability or your credit score.
On the other hand, with a remortgage how much you can borrow will depend on what you can afford to pay back each month. As this is determined by your income and what you spend, if you’ve given up work and have a smaller income in retirement, you might not be able to secure the size of remortgage you need.
The main advantage of remortgaging is that it will usually prove the cheaper option overall. Equity release rates are generally much higher than rates on traditional mortgages, and if you roll up your interest instead of paying it off as you go, equity release debt accumulates quickly too.
In turn, using equity release has the potential to drastically reduce, or even deplete altogether, any inheritance you hope to pass on, whereas should you keep up repayments on a remortgage it won’t have much of an adverse effect on the value of your estate .
How does remortgaging work?
Remortgaging is essentially when you switch from one mortgage deal to another. You don’t have to stay with the same lender ‒ you can move to another lender to get the cheapest deal possible.
You can just remortgage for the amount of your outstanding loan as a means of reducing your monthly bills. However, if you want to raise some cash it is possible to release some of the equity you hold in the property by remortgaging for a higher sum than your outstanding mortgage.
Let’s say your home is worth £200,000 and you have £50,000 left on the mortgage, that means you have £150,000 equity. In this case, you could look to remortgage for £60,000, effectively ‘releasing’ £10,000 of the equity you own in the property.
With a remortgage product, you will be borrowing that sum for a specified term and required to make monthly repayments. Once you reach the end of the mortgage, if the deal has been taken out on a repayment basis then the loan will be paid off entirely. If you’ve gone for an interest-only deal, then you will need to pay back the original sum borrowed at this point.
How does equity release work?
Equity release is a type of mortgage that is only available to people aged over 55. The main type is called a lifetime mortgage, where you borrow against a portion of the equity you own in your property.
You can get this money as a lump sum, or you can opt for ‘drawdown’, where the equity release provider agrees a certain amount that it will lend you overall but you can access that money in smaller sums as and when you need it.
Usually you don’t have to make monthly repayments towards the equity release loan. Instead, interest is charged on the money borrowed, and both the loan and interest paid off through the proceeds of the sale of the house once you die or move into long-term care.
The pros and cons of remortgaging and equity release
The first positive with remortgaging is that it’s relatively simple to do. Most mortgage lenders offer remortgage deals, and you can find a product yourself. This is in stark contrast to equity release, where not only are many of the lenders lesser-known names, but you will usually have to use a broker in order to get a deal in the first place.
Remortgages also tend to be cheaper than equity release plans.
Remortgaging won’t be an option for everyone though. Many lenders have rules in place covering the maximum ages they will consider applicants and the maximum age borrowers can be by the time they’ve paid off the sum being borrowed.
You will also need to be able to demonstrate to the lender that you can afford the monthly repayments from your current income, which may be difficult if you have already retired.
The fact that equity release deals don’t require monthly repayments may mean they appear more affordable. However, it’s important to remember that as the interest is rolled up, in what’s called compound interest where you effectively pay interest on interest as it accrues, by the time the property is eventually sold and the loan paid off, there may be no money left to pass onto your loved ones as an inheritance.
Most reputable equity release providers have signed up to a ‘no negative equity guarantee’ which means that no matter what happens, the cost of your loan will never exceed the value of your home once it is eventually sold on.
What’s more, some equity release providers allow you to make voluntary repayments during the course of the loan so that you reduce the eventual size of your debt.
Another issue to bear in mind is early repayment charges (ERC). It may be that you want to pay off your equity release plan early, perhaps because you decide to move into specialist retirement accommodation. However, ERCs on equity release plans can be substantial, costing you thousands of pounds.
Which method will work for you?
Ultimately, the right option will come down to your own individual circumstances. Remortgaging and equity release are two very different propositions and suit different circumstances. Equity release products, such as lifetime mortgages, can affect tax, benefits and inheritance.
If you’re not sure whether equity release or remortgaging is best for you, talk to a financial adviser ‒ you have to take financial advice before using equity release anyway, and many equity release providers only offer their deals through these specialists. They can then outline which options are open to you, and what it is likely to cost.
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