Suppose you are interested in taking equity release and currently have an existing mortgage. You may be wondering if you still qualify for equity release?
All equity release lenders require that they are the sole first charge on your property. Any existing mortgage or charges will need repaying as part of an equity release. Your/the lender's equity release solicitors will repay any existing mortgage from the equity release funds. Any remaining money is paid into your bank account.
For this reason, one of the first questions you will be asked is, what is the balance of any existing mortgages? It is one of the questions on our equity release calculator.
Let's explore how any existing secured borrowing on your home affects an equity release.
In this guide, you will learn:
Whether you currently have a repayment mortgage or an interest-only mortgage, it is required to be repaid as part of the equity release process. Upon completion of your equity release, it will be the equity release lender that has the first charge on your property, replacing your existing mortgage lender.
All 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 will then be contacted by an equity release solicitors to obtain a formal redemption statement.
A redemption statement shows the balance outstanding at a specific date, and how much additional interest is accrued daily. Redemption statements do not last long, so it is common for them only to be requested once a formal mortgage offer is in place.
The payment to your current mortgage lender is made by either, the equity release lenders solicitor, or your equity release solicitor. Different equity release lenders and their solicitors have differing processes as to who is responsible. But it will not be left to you to make the payment.
It may be that the reason you would like to take equity release is to clear your outstanding mortgage?
Many people wish to pay off their mortgage so that they no longer have to make the mandatory monthly payments and have more money each month in their pocket. In such a case, you will only need funds that cover repaying your mortgage and any equity release setup fees (lender, advisor and solicitors).
If you are looking for equity release for any other reason, you will also be required to clear your mortgage as part of the process. The difference is that you will have to release enough funds to clear your mortgage, pay any fees and, be left with the funds you require.
It is mandatory that you repay your existing mortgage to obtain an equity release. If you find yourself in the position of having a shortfall, there are several options open to you. Let's discuss some of the situations and options available:
The maximum amount you may achieve with an equity release is based on your property value and your age. From age 55 you will be able to release around 25% of your property value, and this percentage will increase with each birthday, up to a maximum of approximately 60% from age 85 onwards.
There are a few reasons why you may be in the position where the maximum equity release is not enough to cover your outstanding mortgage, including:
- Interest-only mortgages. Despite having paid the interest monthly for the duration of the mortgage, the capital balance remains. The capital sum required to repay may be greater than the percentage you can release from your home.
- Younger borrowers. You have a mortgage and want to pay it off to reduce your monthly outgoings. But you are at the lower end of the equity release age bracket, so can only release a smaller percentage from your home.
The first step may be to speak with your current mortgage lender to see if they will extend the mortgage term for you. You may then be able to look at equity release again in a few years. Remember that providing you keep up with your payments, the mortgage balance will not increase. Still, the percentage of funds you can release from your home will increase each year which could cover any shortfall that you face.
Another option you may be in a position to look at is a medically enhanced equity release plan. Some lenders will consider your health conditions, and various lifestyle factors and offer you lower interest rates or increased loan amounts.
It is possible to achieve a maximum release of 38.1% at age 55 on a medically enhanced plan which is significantly more than standard terms.
If there is a small shortfall, you could also look at taking out unsecured borrowing to bridge the gap. I wouldn't suggest this to everyone; however, there are occasions where it may be the most appropriate way to proceed. It could be the difference between being able to stay and having to sell your home.
Regardless whether you have a mortgage or not, any other secured borrowing will likely need repaying as part of your equity release.
Secured loan lenders are usually unhappy with sitting as a second charge to an equity release. This is because the equity release lender will be the priority charge, and the balance will likely be increasing (if you do not make monthly repayments). Therefore the secured loan lender could have reducing security in your home over time.
If you have a secured loan, I would suggest either repaying it with the equity release or discussing the option of changing the loan to unsecured. Your existing loan lender may be able to change your borrowing to unsecured. You may even find there is very little difference to your monthly payment to them after switching.
If you do not know if your loan is secured or unsecured, you can find out by checking your properties title deeds with HM Land Registry. You can complete this directly with them for a small fee, or we can provide a copy to you free of charge (we are happy to pay the fee on your behalf).
Should your loan be secured it will need repaying, but it is unsecured then you do not need to repay it to get equity release.
While it is not compulsory to pay off unsecured debt as part of the process, it is quite common for clients to pay off unsecured debt as part of an equity release. Repaying debt which requires mandatory monthly payments frees up extra cash flow each month, and can be a massive help if you are struggling to make the payments. Each situation is different though, so I suggest discussing your options with your equity release advisor.
As time passes, lifetime mortgages are becoming more and more flexible. Many of the features that you are used to on a standard residential mortgage are now commonplace with lifetime mortgages.
Let's look at the table below, highlighting some of the similarities and differences:
|You retain full ownership of your property.
|The mortgage lender has a registered charge on your property.
|What is the maximum loan amount?
||Based on affordability (typically 4.5 times joint annual income).
||Based on your age and your property value.
|Your eligibility is based on your income and expenditure? (affordability assessed)
|Mandatory monthly payments are required.
|Voluntary payments can be made.
|Minimum age of applicants.
||Usually 18 years old.
||55 years old.
|Maximum age of applicants.
||Typically up to age 75 (The mortgage usually needs to be repaid by retirement).
||No maximum age.
|You have the right to live in your property for the rest of your life.
|Your interest rate is fixed.
||For the initial term only (2/3/5/10 years). Reverting to the Standard Variable Rate after that if not re-fixed.
||Yes for the lifetime of your mortgage.
The simplest way to find out how much equity release you can achieve is to use our equity release calculator.
We don't require any personal details and the calculation results are instant.
Once you have used our equity release calculator, I strongly suggest that you request your free equity release report. The report shows you the amounts that you can release and the associated interest rate that you are likely to receive.
When deciding on the level of funds that you require, you will need to think about how much you will want to be paid into your bank account once any essential costs and payments have been paid.
The essential costs and payments you will need to take into account are:
- Any outstanding mortgage or secured loans - It is worth contacting your lender/s to request redemption figures before speaking with an adviser. This information will allow the adviser to provide you with the most accurate quotes. You can also run a free credit check to see the balances owed.
- Solicitor's fees - You will require a solicitor for your equity release application. If you have a regular solicitor you use, it would be worth checking that they advise om equity release and asking for a price guide. Alternatively, your adviser will be able to give you an estimate of the cost and be able to guide you in the direction of a suitable firm.
- Financial advice fees - You will need to find out how much your financial advisor is charging you for arranging your equity release plan.
- Lender fees - The most common lender fee is an arrangement fee which is payable upon completion of your equity release. Depending on the plan, you may also be charged a valuation fee. Valuation fees are usually payable upfront and are non-refundable.
These payments will be deducted from the equity release funds, and the remainder paid into your bank account. Therefore to ensure you receive the cash required in your bank account at completion, you also need to include your outstanding mortgage and any setup fees. Your equity release advisor should be discussing all of this with you as part of their advice!
On the day that your equity release application completes you will not have to think about paying off your mortgage. The lender's solicitors will clear your existing mortgage. They will also use the equity release funds to pay any other lenders with whom you have an outstanding secured loan.
The remaining funds will be forwarded to your solicitor. Your solicitor will then deduct their fees, before transferring the remaining funds into your bank account. This means that the funds you finally receive are yours to spend and will not need to worry about paying out any further costs.
If you have an existing lifetime mortgage, there are options to borrow additional funds. You can either:
- Drawdown from any pre-agreed reserve facility
- Take a further advance with your current lender
- Replace the lifetime mortgage with a new one giving access to more funds
The first step will be to find out how much you owe your current equity release lender. From here, your equity release advisor will be able to guide you through the process to find out which option is best for you.
If you have an existing equity release and wish to borrow additional funds, book your FREE consultation.
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 legal 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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