People take out equity release plans for a number of reasons, such as funding a holiday, a family wedding or home improvements. Increasingly, however, older homeowners are using equity release as a means to repay an existing interest-only mortgage. Around 16% of our customers at Premier Equity Release use equity release for this purpose, while 2017 data from plan provider Responsible Life revealed that 39% of their customers use their products to pay off a mortgage or other debt.
There are various scenarios in which homeowners may opt to use equity release to repay an existing mortgage. The first is driven by necessity: where an interest-only mortgage is nearing the end of its agreed term but the borrower does not have any other means in place to repay the mortgage balance. It is a condition of interest-only mortgages that the borrower should have a repayment vehicle in place to clear the mortgage debt at the end of the term. In many cases, however, borrowers have either not put sufficient measures in place to do so, or investment plans such as endowment policies or stock investments may not have performed sufficiently well to repay the mortgage in its entirety.
This can mean that the borrower is coming to the end of their mortgage term, has no means to repay the balance and, in a worst-case scenario, could be faced with either repossession by the lender, or having to sell their home. In this case, an equity release plan could be used to clear the existing mortgage debt, and the homeowner is able to remain in their home for the rest of their life without having to make further payments.
Converting your debt from a standard mortgage – whether that’s repayment or interest-only – to an equity release plan means you can stop making regular mortgage payments, freeing up your income to pay for holidays or a wedding, help family out, or simply boost your retirement income and make day-to-day living more comfortable.
There are two basic types of equity release available: lifetime mortgages and home reversion. Lifetime mortgages are by far the more popular type – a single lump sum or multiple drawdowns are paid out and the lending is secured against the equity in the property. No regular repayments are required, although some plans do allow optional payments against the interest that accrues. The homeowner can carry on living in their home until they either die or move into long-term residential care. The lender is repaid the amount borrowed and all interest accrued on the balance when the property is sold.
Home reversion plans work slightly differently. You effectively sell all or a percentage share of your home to the plan provider and, as with lifetime mortgages, can remain living in your property rent-free until you die or move into permanent care. When the property is sold, the provider receives a percentage of the sale proceeds equivalent to the share that they purchased. It’s important to be aware that the amount providers pay for a share of your home will usually be below the current market value.
If you’re looking to pay off a mortgage with equity release, Premier Equity Release has qualified advisers who can make recommendations on the best solution. We offer an honest and impartial service, and will even let you know if equity release isn’t the best option for you.