PF Financial

Remortgage vs Equity release

If you are over 55 and looking to release money home it can sometimes be a complex and a challenging journey. Wherever you want to top up your income or require a lump sum there are a few options available, for the purpose of this article I will be focusing on remortgaging to free up some cash or choosing to use an equity release solution and the key differences between the two.

Homeowners who have an existing mortgage could choose to re-mortgage to unlock some of the cash tied up in their home. This option would also be available for homeowners who have no current mortgage outstanding, however would like to mortgage their home to release the equity. In both instances this would involve arranging a new mortgage with a provider for a sum larger than your previous mortgage. This sounds simple however there are some key fundamentals that need to be considered.

Firstly, obtaining a mortgage is not always as easy as it was many years ago due to stricter borrowing regulations imposed by lenders. These stricter measures were brought into place to protect the borrower from a negative change in interest rates. They also introduced tighter rules whereby you can only borrow a certain amount based on your long term, provable income and the particular lenders affordability calculator.

In simple terms most providers will lend an amount they believe is affordable to you based on your income over the full term of the mortgage.  This can often be a limiting factor.

It’s also important to contemplate how much equity you have in your home if you have an outstanding mortgage. To do this you need an accurate valuation of your home and then minus the outstanding debt. For example, a homeowner whose home was valued at £400,000 and has an outstanding mortgage of £100,000, would have equity of £300,000. Understanding your equity position is important as the greater the equity, the better the mortgage deals that could be available to you.

Another key point to consider is age, as some mortgage lenders may have a maximum age limit in which the mortgage will need to be repaid. This age may be different between lenders however currently the average age is around 75. If we couple this fact with the minimum mortgage term of five years or more for most providers, it may only be a viable or available solution for people under the age of 70.  Retirement Interest Only mortgage options exist which may offer more generous amounts due to the fact only interest payments are met by the borrower rather than capital and interest but the broower still needs to meet affordability criteria.

Equity release in comparison allows an individual to access some of the funds tied up in their home via a loan secured against the value of your property that is repaid once you pass away or move into long-term care. The funds will be tax free and can be paid as a lump sum or small amounts when needed.

The money you unlock from your home can be used how you see fit, home renovation to allow your home to continue to support you, going on holiday, or providing help for a more comfortable retirement. The only condition is, if you currently have an existing mortgage this must be repaid in full.

The amount of borrowing will ultimately depend on the value of your home, current age and standard of health rather than the amount of annual earnings which in some situations are a major benefit. Another key advantage is, no matter how much cash you release, with a lifetime mortgage (one of the most popular forms of equity release) it is not compulsory to make monthly repayments during your lifetime as the loan and interest will be repaid when your home is sold, either when you pass away or move into permanent care.

Equity release is a big decision and in certain circumstances may not always be appropriate, in any key life event or decision all alternatives should be explored before implementation and expert advice should be consulted for verification of the correct course of action.