Can I Release Equity if I Still Have a Mortgage?

6 hours ago

9 min read

Yes, it may be possible to release equity from your home even if you still have an outstanding mortgage. In fact, repaying an existing mortgage is one of the reasons some people consider a lifetime mortgage.

But there is an important point to understand: you generally cannot simply take an equity release lump sum and leave your existing mortgage running alongside it. A lifetime mortgage is normally required to have first charge over the property, so an existing mortgage secured on the property would ordinarily need to be repaid.

For homeowners approaching or already in retirement, this can raise an obvious question:

“If I still owe money on my mortgage, can I use some of the equity in my home to clear it and potentially release some additional cash?”

The answer could be yes, but whether it is a sensible option depends on your age, property value, outstanding mortgage, income, future plans and what you want the money for.

What happens if I still have a mortgage?

A lifetime mortgage is a loan secured against your home. You continue to own your property and can normally continue living there.

If you already have a conventional mortgage, a lifetime mortgage could potentially be used to repay what you currently owe. If there is enough available equity and you meet the lender's criteria, you may also be able to release additional money for other purposes.

For example, imagine:

Your home is worth £400,000
Your existing mortgage is £80,000
You have £320,000 of equity in the property before considering any new borrowing.

Depending on your circumstances and the lender's criteria, you may be able to arrange a lifetime mortgage that provides enough to repay the £80,000 mortgage, with an additional amount released to you.

However, the amount available is not simply a percentage of the equity you have. Lifetime mortgage providers consider factors including your age, property value and the amount you want to borrow.

A worked example:

Let's take a hypothetical couple, John and Sarah, both aged 65.

Their home is worth £450,000 and they still have £70,000 outstanding on their repayment mortgage.

They are finding their monthly mortgage payments increasingly difficult to manage now that they are approaching retirement.

They could potentially consider a lifetime mortgage to:

1. Repay their existing £70,000 mortgage

This would remove their current monthly mortgage payment.

2. Release an additional £30,000

They could potentially use this towards home improvements, helping a family member, or another purpose.

This would mean the new lifetime mortgage would need to provide £100,000 in total.

The potential benefit

John and Sarah could no longer have their existing £70,000 mortgage payment to make each month. Depending on the lifetime mortgage they choose, they may also have the option of making voluntary payments towards the new loan or choosing a plan where no monthly payments are required.

The potential downside

The £100,000 would become a debt secured against their home. If they choose a plan where interest is rolled up rather than paid, the amount owed can increase over time because interest is charged on the outstanding balance.

This means the long-term cost could be considerably greater than the £100,000 originally borrowed.

This is why the immediate benefit of reducing monthly expenditure needs to be considered alongside the long-term effect on the value of the estate.

What if I only have a small mortgage left?

This is where things can become particularly interesting.

Suppose your home is worth £500,000 and you have only £25,000 left on your mortgage.

You might think:

“Surely it makes sense just to carry on paying the mortgage until it is cleared?”

And in some circumstances, that could absolutely be the better option.

For example, if you have a comfortable retirement income and can clear the £25,000 relatively quickly, taking out a lifetime mortgage could introduce an additional long-term debt when you may not need one.

On the other hand, if your mortgage payments are putting pressure on your retirement income, releasing equity could potentially provide a way of clearing the mortgage and reducing your monthly outgoings.

The positives

Your existing mortgage could potentially be repaid.
You may reduce or remove your monthly mortgage payments.
You could potentially release additional funds at the same time.
You can normally remain living in your home.

The negatives

The new borrowing is secured against your home.
If interest is rolled up, the debt can grow over time.
There may be less inheritance left for your family.
There can be fees associated with arranging the new plan.
Your existing mortgage could have an early repayment charge.

The right answer therefore isn't simply “Can I do it?” but “Is it better for me to do it than keep my existing mortgage?”

Could I release more than I owe on my mortgage?

Potentially, yes.

This is one of the reasons homeowners sometimes consider equity release before they have completely paid off their mortgage.

For example:

Property value: £600,000Existing mortgage: £100,000Potential additional cash required: £50,000

If a suitable lifetime mortgage could provide £150,000, the first £100,000 could be used to repay the existing mortgage and the remaining £50,000 could be released for your chosen purpose.

However, this is only an illustration. The amount a provider may be prepared to lend will depend on your individual circumstances and its lending criteria.

It is also important to remember that borrowing £150,000 rather than £100,000 means there is more debt from the outset, and potentially more interest accumulating over time.

What if I am still working?

Having a mortgage does not automatically mean equity release is unavailable.

However, it may not be the only option.

If you are still working and have sufficient income, a conventional mortgage or a later life mortgage could potentially offer a more appropriate solution.

For example, a retirement interest-only (RIO) mortgage could allow you to borrow against your home while making monthly interest payments. If you can afford those payments, this may avoid the compound interest associated with an interest roll-up lifetime mortgage.

The FCA requires advisers, when assessing whether an equity release transaction is appropriate for a customer’s needs and circumstances, to consider alternative ways of raising the required funds. These may include a further advance under an existing mortgage or a new mortgage, where appropriate

This is an important part of the advice process because equity release isn't automatically the best solution simply because you have equity in your home.

What about an interest-only mortgage?

If you currently have an interest-only mortgage, the situation can be slightly different.

You may have reached a point where the mortgage term is ending but you don't have enough money available to repay the capital.

For example:

Home value: £400,000Interest-only mortgage: £100,000Mortgage term ending: within the next two years

You might consider:

selling and downsizing;
using savings or investments;
arranging a new conventional mortgage, if affordable;
considering a retirement interest-only mortgage;
or potentially considering a lifetime mortgage.

A lifetime mortgage may provide a way of repaying the existing mortgage without selling your home, but it is a long-term financial commitment.

A RIO mortgage could be cheaper over time if you can comfortably afford the monthly interest payments, because you are not allowing the interest to compound on itself.

What happens to my existing mortgage?

If you proceed with a lifetime mortgage to repay your existing mortgage, your existing lender will normally need to be paid from the funds released as part of the new arrangement.

Your adviser and solicitor will deal with the legal and financial arrangements.

It is important to check whether your current mortgage has an early repayment charge, as this could add to the cost of switching.

For example, if you owe £75,000 but your existing lender charges a £3,000 early repayment charge, you may actually need to find £78,000 to clear the mortgage, before considering any other costs.

Your adviser should take these costs into account when comparing your options.

Does releasing equity mean I have to stop making payments?

No.

A common misconception is that every lifetime mortgage means you have to stop making repayments.

There are lifetime mortgage products that allow you to make regular or occasional payments. Depending on the product, making payments towards the interest or capital can reduce how quickly the balance grows.

For example, if you released £100,000 and the interest was allowed to roll up, the amount owed could increase over time.

If instead you chose a product allowing you to make payments and paid some or all of the interest as it accrued, the balance could grow more slowly.

The important thing is to choose a product based on what you can realistically afford throughout retirement rather than assuming that avoiding monthly payments is automatically the best option.

Could releasing equity affect my inheritance?

It could.

This is one of the biggest considerations for anyone who still has a mortgage and is thinking about equity release.

Suppose your home is worth £500,000 and you have a £100,000 mortgage.

If you repay that mortgage using a lifetime mortgage and the new loan is £100,000, you have effectively moved the debt from one mortgage to another.

But if the new lifetime mortgage allows interest to roll up, the amount owed could become substantially higher over time.

For example, a hypothetical £100,000 lifetime mortgage at a fixed interest rate of 6% would grow to approximately £179,000 after 10 years if no repayments were made and the interest compounded annually.

After 20 years, the balance would be approximately £321,000.

These figures are purely illustrative and are based on annual compound interest. They do not represent a quote or prediction for any particular lifetime mortgage.

They demonstrate why it is important to consider the long-term cost, rather than simply comparing the amount borrowed with the amount currently owed on your mortgage.

Most lifetime mortgages backed by the Equity Release Council have a no-negative-equity guarantee, meaning you should not have to repay more than the value of your home, subject to the terms of the plan.

Could I use equity release to help my children?

Potentially.

Some homeowners choose to repay their mortgage and release additional money to help their children or grandchildren, perhaps towards a house deposit.

For example:

Home value: £550,000

Existing mortgage: £60,000

Additional amount wanted: £40,000

A suitable later life lending solution could potentially provide £100,000, with £60,000 clearing the mortgage and £40,000 being gifted to the family.

The benefit is that you could help your family while you are alive and potentially see the benefit of that money being used.

The downside is that the additional borrowing increases the debt secured against your home and could reduce the inheritance ultimately available to your beneficiaries.

It is therefore important to consider both sides before making the decision.

Is it better to pay off my mortgage normally?

There isn't a universal answer.

For some people, continuing with their existing mortgage will be the most cost-effective option.

For others, particularly those approaching retirement who are concerned about maintaining monthly mortgage payments, a later life lending solution could provide greater financial flexibility.

Your options might include:

Option	Potential advantages	Potential disadvantages
Continue existing mortgage	Familiar arrangement; may be cheaper overall	You continue making monthly payments
Remortgage	Could potentially reduce monthly payments or change the term	Affordability criteria apply; fees may apply
Retirement interest-only mortgage	Can avoid compound interest if payments are maintained	You need sufficient income to pay the interest
Lifetime mortgage	Can potentially repay existing mortgage and reduce monthly outgoings	Interest can compound and reduce inheritance
Downsize	Could release a significant amount of capital	You have to move home

So, can I release equity if I still have a mortgage?

Yes, potentially.

Having an outstanding mortgage does not necessarily prevent you from considering equity release.

A lifetime mortgage is normally required to have first charge over the property, so an existing mortgage secured on the property would ordinarily need to be repaid.

But it is important to look beyond the immediate attraction of clearing your mortgage payments.

You should consider:

How much is left on your mortgage?
What is your property worth?
How long is left on your mortgage?
What are your current monthly payments?
Are there early repayment charges?
How much additional money do you actually need?
Could you afford a RIO or other later life mortgage?
How would a lifetime mortgage affect your inheritance?
Could you make payments towards the new borrowing?
Are you likely to move home in the future?
Could releasing cash affect means-tested benefits or other financial arrangements?

The most important point

Equity release isn't simply about how much money you can take from your home. It's about finding the most suitable way of meeting your financial needs in later life.

At Viva Retirement Solutions, we look at your circumstances and consider the alternatives before recommending whether equity release or another later life lending solution could be appropriate.

Sometimes the right answer may be a lifetime mortgage.

Sometimes it may be a RIO mortgage, remortgage, downsizing or simply continuing with your existing mortgage.

And if equity release isn't suitable for you, we will tell you.

Important information

A lifetime mortgage is a long-term commitment and is secured against your home. Equity release is not suitable for everyone and may reduce the value of your estate.

Your home may be repossessed if you do not keep up with the repayments on your mortgage.

A fee of up to £995 is only payable on completion of your Lifetime Mortgage if you proceed with an application.

The examples in this article are illustrative only and are not financial advice or an indication of the amount you could borrow. The amount available and the interest rate offered will depend on your individual circumstances, the property and the lender's criteria.

You should seek specialist advice before making a decision about equity release or later life lending.