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 rising interest rates.

Mortgage costs have soared following eight consecutive increases in the Bank of England base rate since December. According to financial website Moneyfacts.co.uk, the average standard variable rate (SVR) is currently 6.64%, compared to just 4.41% a year ago. 

One in six adults now expects to be paying off their mortgage past the age of 65, according to research by Hargreaves Lansdown. On top of the rising cost of living, 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 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. However, 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.

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 the cost of living is soaring. You’ll pay less interest overall, and ease pressure on your household finances if you don’t have to make monthly repayments. 

It can be a particular struggle to meet mortgage repayments from pension income in retirement, and ideally you want to have paid off your mortgage by that stage so that you can focus on pursuing hobbies and spending time with family.  However, according to equity release provider More2Life, households in the age range 55-64 had an average of £106,100 left to pay on their mortgages in 2021, up from £90,000 the previous year.

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 over recent decades, leaving many 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 soared in recent weeks following the government’s disastrous mini-budget, so the cost of borrowing in this way is more expensive than it once was.

The lowest equity release lifetime mortgage rate is now 6.08%, compared to 4.44% at the end of December, according to financial data analyst Defaqto. This increase means that a homeowner taking out a £50,000 equity release loan would pay £13,814 more in interest over 10 years.

However, rates on mortgages have also rocketed, adding hundreds of pounds a month more to mortgage debt. The average two year fixed mortgage rate has risen to about 5.79%, which is more than double where rates stood about 12 months ago, according to Moneyfacts.co.uk.They are now showing signs of stabilising, with several lenders announcing rate reductions in recent days.

Tony Tobin, equity release specialist at Rest Less Mortgages, said: “Using equity release to pay off an existing mortgage is increasingly popular. However, before making such a big financial decision, we look at the customer’s personal situation and whether other options may be more suitable to pay off the mortgage, such as using savings, pension pots, remortgaging or downsizing.

“Only once all of the alternative options have been explored would we advise the customer to take an equity release plan, if this is the best way for them to repay their mortgage.”

“If customers have at least 18 months left on their mortgage they may choose to wait another nine to 12 months in the hope that rates fall. If they have less than nine months left, and it’s the right option for them, they 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. 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?.

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.

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.

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.

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. 

If you’re looking for mortgage advice, 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.

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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