Is it better to release equity or remortgage?

Is it better to release equity or remortgage?

Our financial advisers are often asked whether equity release or a remortgage is the best option. This article will outline the benefits and drawbacks of both a lifetime mortgage and a remortgage so you can compare your options.

What is Equity Release?

An equity release scheme is a way that a homeowner, aged 55 and above, can take advantage of the rise in the value of their property and extract a cash lump sum (releasing equity), without having to sell their home, move out or have to make any mortgage repayments. Furthermore, an equity release product, like a lifetime mortgage equity loan, is typically only repaid when you or your spouse no longer need the house because you have both moved into residential care or have passed away.

The benefits of equity release (lifetime mortgage):

1. There is no mortgage repayment to make.

2. You will have a tax free cash lump sum to do with as you please.

3. You can use the cash lump sum to bolster your income.

The drawback of equity release (lifetime mortgage):

1. You will forfeit a considerable portion of the value of your home with an equity release plan.

2. The loan will be subject to an interest rate which will further eat into the remaining equity of your home.

3. You may have less money to pass on to your family when you die.

4. It is only available to an older borrower (aged 55 and over).

5. The cash lump sum you can access as a percentage of your property's value is quite low at age 55 (but does increase the older you are).

6. There is little opportunity to change the interest rate agreed upon once an equity release product has been agreed, even though a lower interest rate may be available.

7. You need to be mortgage-free to take advantage of equity release. If not, any cash lump sum raised will go towards clearing the existing mortgage and the early repayment charge (if applicable) first, which may affect the overall amount of money you receive at the end.

8. Equity release could impact on any eligibility for means tested state benefits, such as council tax reduction or pension credit.

What is a mortgage? What is a remortgage?

A mortgage is a secured loan that is subject to interest and secured against your property. When buying a house, mortgage lenders typically require a cash deposit from the borrow (although this is not always the case) before they lend the remaining money required. For example, if a house purchase was agreed at £400,000 and the mortgage lender requires a 20% deposit, the purchaser would need to find £80,000 as a deposit for the loan to be granted and for the remaining £320,000 to be passed to the sellers. The deposit is usually in the form of cash for first-time buyers and will be a mixture of home equity and cash for people moving up the property ladder.

There are typically two main types of mortgage:

• A repayment mortgage, where the aim is to have the capital sum repaid in full, along with the interest, by the time the borrower retires (or sooner if possible). This way the borrower will own the property outright and will no longer have any repayments to make in retirement. A repayment mortgage is spread over the full term of the loan and could range from only a few years right the way up to 40 years. In many cases, the interest rate and therefore the monthly repayment can be fixed for a number of years, before the repayments move onto what's known as a standard variable rate, which means the monthly repayment will fluctuate in line with the interest rate set by the Bank of England.

• An interest-only mortgage is a loan whereby the capital is never repaid and the monthly mortgage repayment only covers interest on the loan. Again, the monthly repayment can be fixed for a period of time, before it also moves onto a standard variable rate. However, once the agreed term of an interest-only mortgage comes to an end, the entire loan must be repaid with cash or by extending the loan for another term.

Once the fixed term has passed on a mortgage, the borrower has the opportunity to switch from the existing lender to another lender and take advantage of a different mortgage term (length of loan) and fix a better interest rate, this is known as a remortgage.

During the remortgage process, providing the homeowner has built up enough equity in their home (this is usually a combination of an increase in the value of the property alongside several years of repayments), the borrower may be able to release some of the equity as a cash lump sum in return for a higher monthly repayment. The phrase ‘negative equity’ refers to when the balance of the outstanding mortgage is greater than the value of the property it is secured against.

Equally, if a homeowner has already paid off their mortgage but has since decided that they need to access some cash, they can take out a new mortgage, benefiting from releasing equity but committing to several years of mortgage repayments.

The benefits of a remortgage:

1. You could access a considerable sum of equity from your home with a remortgage.

2. You will not forfeit any ownership of the property by releasing equity with a remortgage.

3. The property will be owned outright at the end of the current mortgage term (assuming the mortgage has been fully repaid).

4. You will be able to pass on the property in full when you die with a remortgage, providing the mortgage is paid off.

5. The minimum age you can remortgage is 18.

6. You can change lenders when you remortgage to take advantage of better interest rates from an alternative mortgage lender.

The drawbacks of a remortgage:

1. You will have to make monthly repayments with a remortgage.

2. The remortgage repayments will affect your monthly disposable income.

3. Any remortgage will be subject to interest payments.

4. A remortgage is typically only available to those in employment (although you may be eligible for a later life mortgage).

5. You may have to pay an early repayment charge to your current lender if you choose to pay off the mortgage early.

Is equity release better than remortgaging?

The best place to start when comparing equity release to a remortgage is to ask yourself why you need the money. Both equity release and a mortgage are a big commitment and you will always need to take financial advice before making any decisions.

Equity release is great for older homeowners that have already paid off their mortgage and need to access a large sum of money without leaving their home. This could be for medical bills, helping family members with house deposits or using the cash to invest or purchase a fixed income product to bolster their income in retirement.

A remortgage on the other hand is likely to be a better option for homeowners that are still in employment and may possibly want to move house again in the future. Once a mortgage is paid in full, the property is owned outright and can be passed on when you die.

Another option to consider, particularly if you are still working and you don't require too much cash, is an unsecured personal loan. Without using your home as security, you may still be able to access sufficient funds to buy a car or take a once in a lifetime trip with a personal loan from a bank or building society and have the full amount repaid within a few years.

Finally, you may be able to access a cash lump sum from a pension or ISA (if you have one) so there really are many options over and above a straight comparison between an equity release product like a lifetime mortgage and a mortgage or remortgage on your home. The important thing is to speak with a financial adviser to better understand your options, based on your personal circumstances - both a dedicated equity release firm or a mortgage broker will likely tell you that their product is best so speaking with someone who is independent is vital.

What’s next?

You can read our in-depth article, What is Equity Release and how does Equity Release work for a more detailed look at Equity Release or head over to our equity release calculator to get a quick estimate on the amount of money you could release from your property with a home equity loan without having to input any personal details.

How AV Trinity can help with your Equity Release and Mortgage questions?

If you need responsible equity release advice you can speak to a Chartered Financial Adviser here in Tunbridge Wells, wherever you are in the UK. Our financial advisers are Equity Release experts and on hand to help you find an equity release plan that suits your needs, whether that's a lifetime mortgage or home reversion plan. We are members of the Equity Release Council and signatories of the Financial Vulnerability Taskforce.

Your financial adviser can also offer broader financial advice on a range of topics from mortgages, remortgages, pensions and investments to inheritance tax and estate planning. We offer a free, no-obligation initial consultation at our office, over the phone or by video chat regardless of where you are in the country. Locally, we serve clients across Kent including Ashford, Maidstone, Sevenoaks and Tonbridge. In East Sussex, we have clients in Bexhill, Crowborough, Eastbourne, Hastings, Heathfield and Uckfield.

This article offers information about financial planning and should not be taken as personal advice. Equity Release will reduce the value of your estate and may affect your entitlement to state benefits. Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.