Many people considering equity release wonder, “Can I still get it if I have a mortgage on my house?”
The good news is, the answer is often yes!
While having an outstanding mortgage does change things a little, it doesn’t automatically mean you can’t use equity release.
Please Note: The content on this page is designed to be a helpful starting point for understanding equity release. It explores the concept, different plan types, and the general process involved. However, equity release is a complex financial decision with significant implications for your long-term financial security. To determine if equity release is the right option for you, it’s essential to consult with a qualified financial adviser who specialises in equity release products.
Am I eligible?
You need to be a homeowner aged 55 or over to be eligible for an equity release lifetime mortgage.
If the mortgage is to be in joint names then you both need to be 55 or over.
Most lenders need your property to be worth more than £70,000.
The type of property you have is also really important. Lenders prefer to accept properties with brick/block walls and sloping tiled roofs.
Anything else may be considered non-standard construction and may lead to rejection. These include:
- timber/steel framed houses
- ex-local authority
- thatched roof
- concrete construction
- retirement properties
What is equity release?
Equity release is a financial product designed for homeowners aged 55 and over.
It allows you to access a tax-free lump sum or smaller regular payments from the equity value you’ve built up in your property over time.
Unlike a traditional mortgage, you typically don’t have to make monthly repayments on the loan amount you receive. Instead, the interest on the loan is added to the total amount borrowed, and it’s all repaid when you sell your home or move into long-term care.
Here are some key things to remember about equity release:
- Ownership: You retain ownership of your property, but the lender gains a charge against it.
- Eligibility: The amount of equity you can release depends on your age, property value, and existing mortgage (if any).
- Costs Involved: There are fees associated with equity release, including solicitor fees, mortgage fees, advice fees, and lender fees.
- Impact on Inheritance: Equity release could reduce the value of your estate passed on to heirs.
Basic types of equity release
Lifetime mortgage – This is what we are covering in this article. A lifetime mortgage lets you borrow against some of the equity in your home. You don’t need to make any repayments. The interest is added to the loan and repaid when you die or move into long term care.
Home Reversion – A home reversion plan involves selling some or all of your property in exchange for a tax free cash sum. There’s no monthly payments and the debt is repaid when you die or move into long term care.
How equity release works with an existing mortgage
One of the most important things to know is that if you take out equity release, your existing mortgage has to be paid off.
Think of it as clearing the slate so the equity release lender can become the primary lender on your property.
When you take an equity release lifetime mortgage, a portion of the money you receive is automatically used to pay off your old mortgage. Any leftover funds then come to you as a lump sum or in regular payments – it depends on the type of plan you choose.
Your lifetime mortgage provider must be the only lender listed on your property. No other mortgages or second charges are permitted.
Don’t worry of this sounds complicated, it’s all handled by your solicitor.
Watch out for early repayment charges!
As you will be replacing/paying of your residential mortgage it’s important to be aware of early repayment charges (ERCs). These are exit fees, charged by lenders, when you pay back your mortgage earlier than expected.
ERCs are usually linked to a specific interest rate deal, like a fixed rate. If you’re just paying the SVR then there shouldn’t be any ERC fees.
If there are exit fees then these can be quite high. Make sure you understand when they are payable and when the ERC period ends. It could be worth waiting a few months and avoiding them altogether.
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Releasing enough to cover your mortgage
Unlike a normal residential mortgage, lifetime mortgages are not based on your income.
The amount you can borrow is a pre-set percentage and determined by your home’s value and your age.
At age 55 this percentage is around 20-25%, and as you get older it can rise to 55-60%.
As you can see, the older you are, the larger percentage of your property’s value you can access.
If you’re on the younger end of the equity release age range (55-60), you might not be able to release enough to fully cover your mortgage.
Repaying an interest only mortgage
Equity release plans are often earmarked as a way of repaying an interest only mortgage once it reaches the end of its term.
Technically, a lifetime mortgage could be used to replace an interest only residential mortgage (it doesn’t pay it off as such), but you don’t have future certainty in the amount that you can borrow.
It’s certainly something to discuss with your mortgage adviser but it’s more a way of avoiding the monthly repayment obligation than actually repaying the debt.
Key differences between residential and lifetime mortgages
While both residential mortgages and lifetime mortgages involve borrowing against your home, there are some important distinctions.
Here’s a quick comparison table:
| Feature | Residential Mortgage | Lifetime Mortgage |
|---|---|---|
| Ownership | You retain full ownership of your property. | You retain full ownership of your property. |
| Secured Loan | Yes | Yes |
| Maximum Loan Amount | Based on your income and affordability | Based on your age and property value. |
| Eligibility | Income and credit checks required | No income/affordability checks |
| Monthly Payments | Mandatory | No mandatory payments, but often voluntary options |
| Minimum Age | Usually 18+ | 55+ |
| Maximum Age | Typically up to age 75 (may need repayment plan by retirement) | No maximum age |
| Right to Live in Home | No | Yes, for the rest of your life |
| Fixed Interest Rate | Usually for an initial period, then reverts to variable | Fixed for the whole duration of the mortgage |
Dealing with an existing lifetime mortgage
If your circumstances change after taking out equity release, you might find yourself needing additional funds. While you are not allowed to have two lifetime mortgages on the same property, you could:
- Use a Drawdown Reserve: If your original plan included a drawdown facility (like a cash reserve), you might be able to access more money without changing your current plan.
- Request a Further Advance: Some lenders allow you to take out a “further advance,” essentially increasing the size of your existing loan.
- Replace Your Lifetime Mortgage: In certain cases, it might make sense to switch to a new lifetime mortgage altogether, a bit like remortgaging. This could give you access to a larger loan amount or a better interest rate.
You might find this interesting: Can you do equity release more than once?
In summary
Even though you currently have an outstanding mortgage debt, there’s still the possibility of getting a lifetime mortgage instead.
You can’t have both, so your current residential mortgage needs to be fully repaid on completion. This is either from funds generated by the lifetime mortgage or with a top-up cash amount from savings.
All borrowers need to be 55 or over, and the amount you could be eligible for depends on your age and property value.
Once done your lifetime mortgage won’t require any monthly payments.
You still owe money to the lender though, and this debt will grow each year as the interest charges are added.
Where to go for advice
Only a suitably qualified adviser is permitted to help you set up or amend an equity release plan.
They will be able to fully explain your options, the costs involved and the advantages and disadvantages.
Once they fully understand your situation they can begin to research your options and select a suitable equity release solution.
Let Respect Mortgages help you.
We can match you to an award winning equity release specialist, with over 25 years experience helping people just like you. Importantly they’re also members of the Equity Release Council.
Please call us on 0330 030 5050 for more details.
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