If you’re nearing the end of your existing mortgage deal you may be worried about your repayments soaring when you come to remortgage, particularly if your finances are already stretched. 

Mortgage rates have been rising following a series of hikes in the Bank of England’s base interest rate, which reached 5% in July 2023. According to financial website Moneyfacts.co.uk, the average standard variable rate (SVR) is currently 7.85%, compared to just 5.17% this time last year.

As a result, you’re likely to face much higher repayment costs when you come to remortgage. The average interest rate for a two-year fixed rate mortgage has rocketed to 6.85%, compared to just 3.95% this time last year. When you’re struggling with higher living costs, a sudden jump in your mortgage repayments can be too much to manage.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “It’s going to come as a particularly unpleasant shock for those currently paying particularly low rates – and people who have borrowed bigger sums of money for more recent purchases. If the rate on a 15-year £100,000 repayment mortgage rose from 2% to 6%, monthly costs would rise from £644 to £844.”

If you’re aged 55 or over and are worried about being able to afford steep payments, equity release could provide one possible solution, although it’s not without its drawbacks. It’ll give you a lump sum that can be used to pay off your mortgage, and you won’t have to worry about making monthly repayments to pay back what you owe. Any money you borrow will be paid back, with any interest owed, either when you die or move into long-term care. Bear in mind, though, that there are a number of downsides to consider before going down the equity release route, and it’s vital to seek professional advice so that you understand the implications. 

If you’re looking for somewhere to start, you can get expert advice from a Rest Less Mortgages equity release specialist. They are active members of the ERC and can advise on equity release mortgages from the whole of the market. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.

Here, we look at the pros and cons of equity release as a way of beating rising costs, and how you can find out if this may be a good option for you.

Benefits of using equity release to beat higher mortgage costs?

Equity release enables you to unlock some of the equity in your property without having to sell it, or make monthly repayments as you would with a standard mortgage. You can use the money released to pay off your mortgage to ease your cash flow and avoid higher monthly repayments. This could provide some immediate relief from financial pressures. Read more in our article Equity release – what is it and how does it work? 

Equity release plans have become increasingly flexible in recent years, so if you find yourself with any spare cash available, you can now make partial loan repayments to reduce the amount owed.

You should never owe more than your home is worth when it’s eventually sold as equity release providers who belong to the Equity Release Council, which is the trade body for the equity release sector, include a ‘no negative equity’ guarantee for some financial security.

Tony Tobin, equity release expert at Rest Less Mortgages, said: “For one reason or another our customers aged 55 or over may find that they cannot afford to move to the higher fixed or variable mortgage rates when they remortgage, as doing so would completely destroy their current budgets. For example, someone may currently be on a 2.5% mortgage rate and face a jump to 5% on remortgaging, or higher, with their current lender. That’s when we may look at equity release as an option, as they can choose to make no payments, or they have the flexibility to make voluntary ad hoc payments to reduce their debt over time if they want.

“Obviously, this would all be subject to a full equity release fact find and we would not advise this route if it was not the best option. If it’s not suitable, we can then see if we can get a better rate than their current provider is offering on a standard mortgage, but of course we will give the customer the chance to make an informed final decision.”

Equity release calculator

See how much you could release from your home with this free, easy-to-use equity release calculator. Fill in a few details to get an estimate now.

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The downsides of equity release

Equity release should be entered into with a thorough understanding of how it works, whether it’s a suitable option for you, and the downsides. For example, you may not be eligible for equity release if you’ve still got children living with you, and they may not have the right to remain living in the property if you die or move into care. 

Rates for lifetime mortgages, which are the most popular type of equity release plan, have also risen in recent months. The lowest rate available on an equity release plan is currently 5.96% compared to 5.77% in August 2022, according to financial analyst Moneyfactscompare.co.uk

Lifetime mortgages charge interest both on the original sum you took out from your home’s equity, and on the interest added over time (a process known as compounding, as you pay interest on top of the interest already charged). This could see the amount you owe over the years build into often enormous sums. You can use our compound interest calculator to understand how much a lifetime mortgage might cost you over 10, 20 or 30 years. Releasing equity also reduces the value of your estate, and therefore any inheritance received by your beneficiaries will also reduce. The proceeds from the sale of your property on your death will be used to repay the equity release loan.

Equity release can also affect your entitlement to government benefits, as plenty of these are means-tested so if you release money from your home this could impact what you receive. Find out more in our article What are the risks of equity release? 

When you’re choosing an equity release provider, make sure it’s a member of the Equity Release Council. Products provided by its members must, for example, not only provide you with a ‘no negative equity guarantee’, but also the right to remain in your property for life or until you need to move into long-term care.

Using equity release to repay your mortgage

Using equity release to repay your mortgage early could be particularly beneficial when the cost of living is rocketing, and take the pressure off your finances as you won’t have to make monthly repayments. Bear in mind, though, that equity release providers insist you must pay off your full mortgage balance rather than part of if you’re using the tax-free cash for this purpose. 

If you’re considering paying off your mortgage early, though, it’s really important to check the terms of your deal to see whether you’ll have to pay any early repayment charges first. These can sometimes amount to hundreds or thousands of pounds, so you might decide to wait until your current deal finishes before you pay your mortgage off in full.

Before taking out an equity release plan, check all the fees and charges involved too. For more information, read our guide Costs of equity release explained. If you decide to go ahead, the released equity will be transferred directly to your mortgage lender, and if there is any money remaining after your mortgage has been paid off, this will be paid to you to use as you wish.

How much equity can you release?

If you’re using equity release to pay off your mortgage you’ll want to ensure you can release enough to do so, unless you can supplement this with savings or other income. The amount you can release depends on the value of your property, and various other factors. 

If you want to see how much you might be able to release from your home and how much it could cost, this equity release calculator can give you an estimate. Fill in a few details to get an estimate.

Possible alternatives to beat rising mortgage rates

Equity release won’t be right for everyone, so you may want to explore other ways to keep your mortgage payments down. For example, you may be able to extend your mortgage term to reduce your monthly payments. Bear in mind, however, that doing so will mean you pay back more interest overall.

Alternatively, you may want to consider taking out a retirement interest-only mortgage, where you only pay the interest on the amount borrowed rather than any capital. This type of mortgage enables you to carry on making interest payments indefinitely, with the loan paid back only when you die or move out. You can learn more about retirement interest-only mortgages in our guide How retirement interest-only mortgages work. By contrast, a standard interest-only mortgage finishes on a specific date and you must repay the capital you owe on this date. 

You can find out more about the different mortgage options that may be available to you, and how they compare, in our articles Mortgages for the over 50s: What you need to know and Mortgages for the over 60s: what you need to know. Learn about other alternatives to equity release in our guide Alternatives to equity release.

Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for somewhere to start, you can speak to a Rest Less Mortgages advisor and get high quality advice on residential, retirement interest-only, equity release and buy-to-let mortgages.

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