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With the cost of living in the UK rising, we have certainly seen an increase in enquiries regarding debt. But how can equity release help?

You can use equity release to pay off (consolidate) debt. Any debt can be repaid, including credit cards, bank loans, County Court Judgments (CCJs) and Individual Voluntary Arrangements (IVAs). No monthly payments are required, and you will have the right to live in your home for the rest of your life.

Equity release can be a great solution if you want more flexibility with your debt and payments.

If you are considering using equity release, knowing the positives, negatives and considerations when consolidating your debt is essential.

Using equity release to consolidate unsecured debt

Using equity release can be a great tool to consolidate unsecured debts. But firstly, what is an unsecured debt?

Unsecured debt is any debt not secured against an asset, for example, your property.

Types of unsecured debts include:

  • Credit cards
  • Bank loans
  • Utility bills
  • Council tax

Equity release offers a tax-free lump sum of cash secured against your property, and the funds can be used to consolidate debts. You may also have the option to take further funds, which can be spent on anything you like.

Unlike conventional mortgages, equity release is designed to run for the rest of your life. The initial amount borrowed and interest charged is usually repaid when the last borrower passes away or moves into long-term care.

Do you need help to keep up with monthly payments?

Falling behind on your payments can be worrying, but you can always get help.

Unlike many other financial products, you do not need to make monthly payments towards equity release - unless you want to.

This can be great for people who:

  • Are struggling to keep up with monthly payments;
  • Want to free up their monthly income to help their family;
  • Want to increase their surplus to spend on lifestyle throughout retirement.

What type of unsecured debt can be repaid?

The good news is that you can repay any unsecured debt using equity release, including even County Court Judgments (CCJs).

CCJs are debts that have had court proceedings applied to them. Most equity release plans require you to repay them as part of the process, but you can use the money from your equity release.

While you will generally struggle to get new finance when you have active CCJs, it will not affect your eligibility to take an equity release.

Is equity release an expensive way to consolidate debt?

Although you do not need to make monthly payments towards an equity release, the plan still accrues interest.

Even if the equity release interest rate is lower than your current debt, it can still be more expensive due to the time the plan runs. This is because most people choose not to make payments towards the equity release, so the interest accrues over time.

However, if you choose to make payments towards the equity release, it could be a cost-effective way to consolidate debt.

Your equity release advisor will be able to discuss your options and financial objectives to establish the best way forward.

Is it a good idea to consolidate debt with equity release?

Using equity release to consolidate debt can be a good idea, but it depends on your circumstances.

It is often best for those struggling to pay every month or those who prefer the flexibility of choosing to pay or not.

This is because equity release does not require payments, but all plans offer the option to. Typically, you can pay up to 10% of the amount borrowed within any 12-month period without penalty. If you wish to pay more than this, there may be an early repayment charge specific to your plan.

It is also worth considering that with fixed-for-life interest rates, equity release can be more cost-effective than continuing to pay existing debts. Your advisor will guide you best if you want to accomplish this.

Moving unsecured debt to secured debt

Before taking equity release, you must know the implications of moving unsecured debt to secured debt. Unsecured debts can only affect your home if the creditor (whom the debt is with) goes through a lengthy process to secure the debt against your home.

However, with equity release, you are moving the debts to be secured against your home with an equity release.

While this can be scary for a standard secured loan, as you still have to commit to making the monthly payments, and if you do not, the creditor could try to take your home to repay the balance (repossess).

The great news is that you do not have to make any monthly payments with equity release.

Repossession due to missed payments cannot happen with equity release, as you don't need to make monthly payments.

However, the equity release lender will have the right to repossess your home, similar to a regular mortgage.

This only happens if you break the terms and conditions of your plan - which your equity release advisor will fully explain during your meetings.

Examples of these terms and conditions include:

  • Keeping your property in overall good repair. If your roof falls off, you need to replace it (which I am sure you would want to anyway!)
  • You start running a commercial business from the property without prior consent from the lender.
  • The money is not repaid within one year of the last borrower passing away or moving into long-term care.

As you can see, these are extreme scenarios, so equity release is very safe when using it to consolidate debt.

Using equity release to consolidate secured debt

Equity release plans allow you to repay secured loans without monthly payments.

If you have existing secured loans on your home or vehicle, equity release could be a great option.

It is essential to know that all equity release lenders must be the sole charge on your property after you take out an equity release.

So, if you have existing secured borrowing on your home, you must repay it when taking out equity release.

Do you have to pay off a debt consolidation loan when taking equity release?

You may have to pay off a debt consolidation loan to take equity release. However, it depends on the type of loan, as there are two:

  • Unsecured debt consolidation loan
  • Secured debt consolidation loan

Let's look at these in more detail.

Unsecured debt consolidation loans

As part of your equity release application, you do not need to clear your unsecured debt consolidation loan if you do not want to.

You can continue to make your monthly payments towards the loan and use equity release for anything else you wish.

Secured debt consolidation loans

On the other hand, you would need to clear a secured debt consolidation loan. The equity release must sit as a first charge on your property, with no other loans or debts secured against it.

Typically, the lender will allow you to use the equity release funds to repay the secured loan, so it should be fine if you don't have the cash available to you now.

Do you have to repay a Debt Management Plan (DMP) when taking equity release?

Some equity release lenders and products require you to repay the debt management plan (DMP) on or before receiving the funds.

However, some products allow you to keep it in place but will have a maximum amount that they allow. In this case, the lender may look at your circumstances on a case-by-case basis.

You may be asked:

  • What is included in the debts? Is it loans, credit cards, or CCJs?
  • How did the debts come about?
  • What is the total amount outstanding?
  • How many creditors are there?

After providing this information, we can discuss this with the equity release lenders to review. Hopefully, they accept the application to proceed.

What to consider before taking equity release to consolidate debt

Before consolidating any debt, I encourage you to speak with your existing lenders. They may be able to offer you more preferable payment terms to those that you are currently on.

Furthermore, consider contacting a debt charity if you are struggling to meet your monthly payments.

Finally, and most importantly, I want to ensure that after you have consolidated your debts, you will be in a better financial position each month.

It is essential that after taking an equity release to consolidate debt, you have surplus income each month and are not left in a deficit.

Can you get equity release with bad credit?

Unlike many financial products, you can get equity release with bad credit. This is primarily due to eligibility not being affordability assessed and having no commitment to mandatory monthly payments.

Instead, the amount achievable and associated interest rate is largely based on two factors. These are property value and the youngest homeowner's age.

Bad credit might limit the lenders and products available to you, but there is almost always a solution with equity release.

You can read our complete guide on equity release with bad credit here.

If you have further questions, why not speak with one of our qualified advisors?

Call us on 0207 158 0881 or use our online form to book your FREE consultation.

While a qualified equity release advisor has written this guide, it is not intended to be used as financial nor tax advice and should not be relied upon.

To understand the full features and risks of an Equity Release plan, ask for a personalised illustration.

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