If you own your own home, it’s likely that your property is your biggest asset. If you wish to access some of its value, but aren’t keen on moving, then equity release or remortgaging can both be ways of releasing funds.
In this article we’ll explore the differences between remortgaging and equity release, as part of our series on later life mortgages and borrowing.
As an individual gets older, they may wish to free up some capital, for a variety of reasons, such as to make home improvements or adaptations to their property, to pay off old debts, to gift a mortgage deposit to a younger family member, or simply enjoy a more comfortable retirement.
There’s a tendency for people to think that equity release is their only option if they want to borrow against the value of their own home, but remortgaging can also allow an individual to stay in the family home.
Before rushing in and making a decision about what kind of loan to take out, it’s important to be aware of all the options available.
What is remortgaging?
Remortgaging simply means changing a mortgage deal in some way, and, while it is most common to switch to a new lender and/or get a better interest rate for example, it can also be used as a way to raise money. In this scenario, the homeowner is essentially asking to increase the size of their loan, to free up more cash. Many people in retirement look into remortgaging because it allows an individual to stay in their own home whilst releasing a lump sum of money that can be used for a variety of purposes.
Remortgaging works a little differently to taking out a mortgage on a new property. If a person is remortgaging , they would have built up equity by either making payments towards reducing their mortgage balance or due to the property value increasing.. For example, if a property is worth £300,000, and the outstanding mortgage debt is £100,000, the homeowner has built up £200,000 in equity, some of which could be released to be used for other purposes.
Luckily, age limits around remortgaging are generally becoming more relaxed. In fact, at Ipswich Building Society, we don’t have age caps on our standard residential mortgage products for capital and interest repayment products but anyone considering this option, regardless of which lender they choose, will still need to meet eligibility criteria and the lender’s affordability assessment.
Homeowners could also choose an interest only product which would reduce the size of their monthly repayments (but not contribute towards paying off the mortgage balance). However, they would have to show an ability to repay the capital at the end of the term before being accepted – unlike an equity release plan, the individual will need to go through a full application process, proving affordability and evidence of income and outgoings.
What is equity release and what are the two equity release plans?
Equity release is another way of accessing the cash tied up in a property, either in the form of a lump sum or in smaller amounts as and when needed. The most common form of equity release is a lifetime mortgage, where a homeowner borrows money secured against their home. It is normally repaid through the sale of the home when the individual dies or moves into residential care.
A person might consider an equity release plan as a way to unlock funds from their property, and also because there are more freedoms over how they spend this money than there would be with a remortgage. Often, there won’t be any credit checks or affordability criteria to meet either. However, most equity release plans don’t ask for the interest to be repaid until the property is sold, which means that the interest is rolled up, or ‘compounds’, over many years. When an individual comes to sell their home, they will not only owe the amount initially borrowed but the compounded interest too, which could eat into the remaining equity in the property.
Home reversion plans are also a form of equity release, where a person may raise money by selling all or part of their home while continuing to live in it, and maintain it, until they die or move into care. Just as with remortgaging, equity release is a big decision that requires serious consideration.
It’s worth bearing in mind that equity release products evolved at a time when mortgage providers were fairly reluctant to lend to older borrowers which is absolutely not the case today. It’s much easier and more commonplace for people in their 50s, 60s and 70s through to their 90s in some cases, to access a standard mortgage.
Takeaways – equity release vs remortgaging
For those who are asset rich but cash poor, remortgaging or equity release can be an ideal way to fund retirement plans.
Both allow the individual to continue living in their home, but the biggest differences lie in the inheritance they leave behind, the interest rates and the minimum age requirements.
Speaking with a specialist later life financial adviser can help older borrowers understand the options available to them and ensure they reach the right decision for their individual circumstances. While previously it may have been necessary to seek advice from different specialists in separate niche areas, it’s now possible to get a more comprehensive overview of later life planning from one adviser who can help homeowners assess all the different options available to them.