Homeowners in their fifties and sixties may be worried about whether they will be able to pay off their mortgage before or during retirement, especially given steep interest rates.
Mortgage costs have soared following 14 consecutive increases in the Bank of England base rate since December 2021. According to financial website Moneyfacts.co.uk, the average standard variable rate (SVR) is currently 8.18%, compared to just 4.41% a couple of years ago.
More than half a million (515,067) homeowners are still paying a mortgage beyond the age of 55, according to research by the Equity Release Council, and one in five do not expect to retire mortgage-free. On top of rising living costs, mortgage repayments can place particular strain on household finances in retirement.
However, if you’re aged 55 or over and own your home, equity release could potentially provide you with a lump sum that can be used to pay off your mortgage. Any money you borrow only has to be paid back, along with any interest owed, when you die, or move into long-term care. Bear in mind, though, there are several downsides to be aware of if you’re considering taking this route, not least that it will reduce the value of any inheritance you might have planned to leave, and it could affect your entitlement to means-tested benefits.
Here, we explain how equity release can be used to pay off your mortgage early, what the pros and cons of doing this are, possible alternative options, and where to seek advice.
Want to speak to a mortgage advisor? 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 expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
Should you pay off your mortgage early?
Your mortgage is probably your biggest financial commitment, and if you can afford to do so, there are plenty of reasons you might want to pay it off early, particularly when living costs are high. You’ll pay less interest overall, and ease pressure on your household finances if you don’t have to make monthly repayments.
If you’re looking at ways to pay off your mortgage early, make sure you 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.
Should you use equity release to pay off your mortgage?
Property prices have rocketed in many areas over recent decades, leaving plenty of homeowners with a substantial amount of equity in their property. Equity release could free up some of the equity tied up in your home, without you having to sell it, with the money being used to clear your existing mortgage. Any surplus funds can be spent on anything you want, with many people choosing to help their family financially or to make home improvements. Read more in our article Equity release – what is it and how does it work?
However, rates on equity release plans have risen sharply in recent years so the cost of borrowing in this way is more expensive than it once was.
The lowest equity release lifetime mortgage rate is now 5.47%, compared to 4.44% a couple of years ago. This increase means that a homeowner taking out a £50,000 equity release loan would pay £16,041 in interest over 10 years at the 5.47% rate, compared to £12,676 if they’d released equity at the lower rate of 4.44%. These calculations assume that initial charges of £1,000 have been added to the loan.
However, rates on mortgages have also risen, often adding hundreds of pounds a month more to homeowner’s mortgage debt when they come to remortgage. The average two year fixed mortgage rate has risen to about 5.93%, which is more than double where rates stood about two years ago, according to Moneyfacts.co.uk, although best buy deals are available starting from 4.63%.
If you’re considering using equity release to pay off an existing mortgage, it’s essential to seek professional finance advice to ensure that there aren’t any other more suitable options you can use to pay off your mortgage, such as using savings, pension pots, remortgaging or downsizing.
If you have at least a couple of years left on your mortgage, you might be considering waiting a few months in the hope that rates fall, or if you’re sure it’s the right option for you, you may decide to go ahead, regardless of equity release rates. A growing number of customers are also making voluntary payments, which equity release plans allow, to at least cover the interest.
Taking out an equity release plan is a major financial decision, and it’s vital to understand the details before you proceed. The main downside to be aware of when it comes to equity release is the impact of compound interest. Since you’re not paying off either the loan or the interest on the loan, the amount owed accumulates at a greater rate each year than it would if you were making repayments. However, as mentioned, equity release providers now allow you to make partial loan repayments during the term to reduce the amount owed.
You should also be aware that releasing equity from your home reduces the value of your estate, as the property will be sold when you die or move into long-term care, with the proceeds used to pay off your debt. This also means that you cannot pass your property onto beneficiaries.
When you take out an equity release plan, the rules state that you must seek independent financial advice to decide if it’s right for you.
You can read more about equity release in our article Equity release – what is it and how does it work?, or more about each kind of equity release product individually in Lifetime mortgages explained and Home reversion – what is it and how does it work?
Want to speak to a mortgage advisor? 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 expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
How much equity can you release to pay off your mortgage early?
If you’re considering using equity release to pay off your mortgage early, you should work out how much tax-free cash you can access. The amount you can release depends on a range of factors, including the value of your property. You might, for example, own a property valued at £400,000 and want to release £100,000 to pay off your mortgage. However, if you cannot release enough to pay off your outstanding mortgage, you’ll have to work out if you can repay the full balance using savings or pension withdrawals, as equity release providers stipulate that any existing mortgage must be paid off.
You can see how much you might be able to release from your home by using this free online equity release calculator. If you want to look into equity release, you should always seek professional financial advice as the next step.
Make sure you’re aware of all the fees and charges involved in equity release 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.
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, provide you with the right to remain in your property for life or until you need to move into long-term care. They also offer a ‘no negative equity guarantee’, so that you can never owe more than the value of your property even if property prices fall.
Alternative ways to reduce or pay off your mortgage
As mentioned above, there are a variety of other ways that you might choose to repay your mortgage. Which is most suitable will depend on your personal circumstances, but some options include using existing savings, overpaying your mortgage, or drawing money from your pension to pay off your mortgage in retirement. Alternatively, you may want to release equity by downsizing or moving to a cheaper area to raise a cash lump sum. Read more in our articles Should I overpay my mortgage?, Six alternatives to equity release and Five questions to ask yourself if you’re considering downsizing.
If you’re currently sitting on your lender’s standard variable rate (SVR) you can look around for a new deal to help lower your repayments. You may choose to remortgage to a standard mortgage, or a retirement interest-only mortgage, for example. You can find out more in our guide Mortgages for over 50s: What you need to know and How retirement interest-only mortgages work.
Want to speak to a mortgage advisor? 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 expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,250 reviews.
You could also consider putting any spare cash towards paying down your mortgage rather than putting it in a savings account. You can find out the pros and cons of overpaying your mortgage in our article Should I overpay my mortgage? You could potentially save thousands of pounds in interest and reduce your mortgage term by doing so.
Most importantly, if you’re struggling to pay your mortgage, don’t panic, as there are options you can explore to reduce the pressure on your finances and avoid putting your home at risk. Find out more in our article What can you do if you can’t pay your mortgage?
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