As you head into your later years, there are plenty of reasons why you might want to tap into some of the equity that has built up in your home. Perhaps you need to carry out some home renovations, or repay some debts. Maybe you want to help a loved one onto the housing ladder, or just financially in general.
If these are the kinds of things you’re considering, equity release or remortgaging are two potential options for accessing the funds in your property in later life.
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 may be the only one of these options available to you.
If you do qualify, equity release might offer the chance to access 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 are looking for.
The main advantage of remortgaging is that it will usually be the cheaper option overall. Equity release rates are generally higher than mortgage 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 through your property, whereas remortgaging shouldn’t, assuming you keep up with your repayments. Equity release may also affect your entitlement to certain means-tested state benefits, while remortgaging will not.
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How does remortgaging work?
Remortgaging is essentially when you switch from one mortgage deal to another. You can either remortgage with the same lender or move to another lender to get a better deal.
You can simply remortgage for the amount of your outstanding loan, and if you move to a lower rate, your monthly mortgage repayments should reduce. 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, you will be borrowing that sum for a specified term and required to make monthly repayments. Once you reach the end of the mortgage term, if the deal has been taken out on a capital repayment basis, and you’ve made every payment on time, the loan should be paid off entirely. If you’ve opted for an interest-only mortgage, then you will need to pay back the original sum borrowed at this point.
» MORE: What is a remortgage and how does it work?
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 a ‘drawdown mortgage’, where it’s agreed you can borrow a certain amount overall which you can access 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 are paid off through the proceeds of the sale of the house once you die or move into long-term care.
» MORE: What is equity release?
Remortgage or equity release: The pros and cons
Remortgaging
The first positive of remortgaging is that it’s usually relatively simple to do. Most mortgage lenders offer remortgage deals, and if you’re confident making a choice, you can arrange a remortgage yourself. This is in stark contrast to equity release, where the relative complexity of the products, and potential risks, means you must always seek advice from a qualified equity release adviser before proceeding.
The interest rates on remortgages also tend to be lower than on equity release plans, and it gives you the chance of passing on as much of your home as possible as an inheritance too.
Remortgaging won’t be an option for everyone though. Many lenders have upper age limits for mortgage applicants or maximum age borrowers can be by the time a loan must be paid back.
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 prove more difficult if you have already retired. There are various remortgage costs to consider too.
» MORE: How to remortgage to release equity
Equity release
The option to borrow using equity release without needing to make monthly repayments has obvious appeal. However, the downside is that you’re always paying interest on the full amount you’ve borrowed as well as on the interest that you’ve already been charged. This constant rolling up of interest – known as compound interest – means your overall debt rises quickly. It’s also why, by the time the property is eventually sold and the loan must be paid off, there may be little or no money left to pass onto your loved ones as an inheritance.
Lenders that are part of the Equity Release Council – a trade body which sets standards aimed at safeguarding consumers –must offer a ‘no negative equity guarantee’ which protects you and those you’ll leave behind if property prices were to fall. The guarantee ensures that if the amount raised when your home is sold is not enough to cover your loan repayment, neither you nor your family or beneficiaries will be liable for making up the difference. If you’re considering equity release, it’s essential to only consider lenders that are members of the Equity Release Council.
If you’re in a position to do so, there are equity release products that allow you to make voluntary repayments during the course of the loan, therefore reducing the eventual size of your debt.
However, be aware that if you want to pay off your entire loan early (so before you move into long-term care or die), hefty early repayment charges may be payable.
» MORE: Is equity release safe?
Is it better to remortgage or use equity release?
Whether equity release or remortgaging is the right option for you will depend on your own individual circumstances and preferences. Equity release is generally considered to be the more expensive option but if you’re struggling to get accepted for a remortgage, you may feel it is the only choice you have. Before choosing either, you may want to consider other options, such as a personal loan or a secured loan, too.
If you’re in any way unsure, talk to a financial adviser. There may or may not be costs involved but advice is needed before using equity release anyway. Making the right choice is likely to save you money in the long run too.
» MORE: Mortgage advice explained
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