Should you use equity release to pay off your mortgage?

Older homeowners with mortgages are struggling to save more in later life, according to new research.

Rising interest rates since 2021 have put increasing pressure on those people with tracker and variable mortgages, including the estimated 2.86 million people aged 55+ who have home loans. 

Research carried out by the Equity Release Council and Canada Life found that 18% of UK homeowners with a mortgage aged 55+ – equivalent to around 515,000 people – say that having to make repayments is stopping them from saving more for retirement.

Here, Which? looks into the worries older people have about their mortgage debt and investigates whether it’s a good idea to use equity release to pay off your mortgage to help secure a more comfortable retirement.

More older people worried about mortgage debt

Overall, the research found 18% of older mortgaged homeowners do not expect to retire mortgage-free, while another 19% are not sure and 60% are confident of clearing their debt.

16% of mortgage holders aged 55 and over say the burden of mortgage debt is holding them back from retiring completely. This figure is up from 14% in 2021. 

10%  also say that their loan is stopping them from reducing their hours at work, more than double the number impacted in 2021 (4%).

• Find out more: how much will you need to retire?

Using equity release to pay off your mortgage

One way for over-55 homeowners to clear their mortgage is by taking out equity release. 

Separate research from Key Later Life Finance shows that the value of funds freed up via equity release and used to repay an existing mortgage rose from 30% in 2022 to 34% last year.

It’s likely that this rise has been driven by the significant increase in monthly mortgage repayment costs for many older borrowers. 

Equity release, with the ability to move to optional or indeed no monthly payments, can represent a lifeline for many homeowners who would not be able to afford to remain in their home otherwise.

• Find out more: what is equity release and how does it work?

What you need to know about equity release and your mortgage

Your existing mortgage is required to be repaid in full as part of the equity release process. 

Equity release application forms include a section for any existing mortgages. You will need to list the lender, your mortgage reference, and an approximate balance to be repaid. Your current mortgage lender is then contacted by an equity release solicitor to obtain a formal redemption statement.

You may just want to pay off your mortgage so that you no longer have to make the mandatory monthly payments and can therefore save more towards your retirement.

If you are looking for equity release for any other reason, you will still be required to clear off your mortgage first. You’ll therefore need to release enough funds to repay your mortgage, plus an additional amount to meet your other requirements. 

If you take out an equity release product recommended by HUB Financial Solutions, Which? will earn a commission to help fund our not-for-profit mission 

Weighing up equity release

Aside from the appeal of being mortgage-free via equity release, there are other pros and cons to consider.

Pros

• It can prove useful if you have value tied up in your property but are worried about having enough to live on in retirement, or to cover care costs.
• You can use the tax-free cash however you wish, whether that’s to pay off debt, for home improvements or helping out relatives. 
• You’ll be able to stay in your home for the rest of your life or until you move into care so won’t face the potential hassle of having to move.
• Equity release carries no obligation to make any repayments, although some products allow you to do so.

Cons

• Making no repayments on your loan will mean you end up paying far more than you’ve borrowed, due to the compounding of interest. This could mean the value of your property is wiped out entirely.
• If you change your mind it can prove costly as repaying your loan early often triggers an early repayment charge.
• Borrowing via equity release will often reduce the size of your estate and the amount you’ll be able to leave behind for loved ones as the lender is repaid before the rest is divided among beneficiaries.
• It can also impact any means-tested benefits you are entitled to – for example, pension credit and reduced council tax.

Seek financial advice  

If you do opt for a lifetime mortgage, the most popular type of equity release, you’ll need to obtain regulated advice from a qualified equity release adviser. This is a requirement of the Financial Conduct Authority.

Providers selling equity release must therefore offer advice. The Equity Release Council has a directory of financial advisers with equity release experience.

It is better to have an adviser that isn’t restricted to recommending products from just one or two firms.

Equity release brokers such as HUB Financial Solutions, Age Partnership and Key Later Life Finance can look across the whole of the market to find the product that meets your specific requirements. 

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