If you are over the age of 55 and looking to release money from your home, comparing a remortgage with equity release can feel complex. Whether you want to top up your income or require a lump sum, this guide explains the differences between remortgaging to release equity and using an equity release plan.
Homeowners with an existing mortgage may be able to remortgage to unlock some of the equity tied up in their home. This option is also available to homeowners who have no current mortgage but wish to borrow against their property to release some of its value.
In both cases, this involves arranging a new mortgage for an amount greater than your existing mortgage. While this may sound straightforward, there are several important factors to consider.
Obtaining a mortgage is not always as simple as it once was due to stricter lending regulations. These rules were introduced to help protect borrowers from changes in interest rates and require lenders to assess affordability based on your long-term, provable income.
In simple terms, most mortgage providers will only lend an amount they believe you can comfortably afford to repay over the full mortgage term. This can often limit the amount you are able to borrow.
It is also important to consider how much equity you have in your property if you already have an outstanding mortgage. To calculate this, you need an accurate valuation of your home and then deduct the outstanding mortgage balance.
For example, if your property is worth £400,000 and your outstanding mortgage is £100,000, you have £300,000 of equity. Understanding your equity position is important because the greater your equity, the better the mortgage deals that may be available to you.
Age is another key consideration. Some mortgage lenders have a maximum age by which the mortgage must be repaid. While this varies between lenders, the average maximum age is around 75.
When combined with the minimum mortgage term of five years or more offered by many lenders, remortgaging may only be a practical solution for borrowers under the age of 70.
Retirement Interest-Only (RIO) mortgages may offer a suitable alternative, as borrowers only make interest payments rather than repaying both capital and interest. However, affordability assessments still apply.
How does equity release compare?
Equity release allows you to access some of the money tied up in your home through a loan secured against your property. The loan is typically repaid when you pass away or move into long-term care.
The money released is tax-free and can be taken as either a lump sum or in smaller amounts when needed.
You are free to use the money however you wish, whether that is for home improvements, helping family members, funding holidays or supporting your retirement.
If you already have an existing mortgage, it will usually need to be repaid in full when taking out an equity release plan.
The amount you can borrow depends on factors such as the value of your home, your age and your health, rather than your annual income. This can be a significant advantage for some homeowners.
With a Lifetime Mortgage, one of the most common forms of equity release, monthly repayments are not compulsory. Instead, the loan and any accrued interest are usually repaid when your property is sold after you pass away or move into permanent care.
Equity release is a significant financial decision and may not be suitable for everyone. It is important to consider all available alternatives and seek expert advice before deciding which option is right for your circumstances.
Learn more about Equity Release.