Clearing a mortgage is often at the forefront of a homeowner’s mind, and as you move into retirement, you might have considered clearing your mortgage to free up your disposable income.
Learn more about clearing your mortgage in retirement and if equity release can help you free-up your retirement income.
Should you pay off your mortgage early?
Whilst paying off your mortgage can offer peace of mind and free up your income to enjoy during your retirement, paying off your mortgage might not always be the right choice for you.
Whilst there are a few options to help you pay off your mortgage early, it is important to take a look at the pros and cons, in addition to any factors that may impact your ability to repay your mortgage early.
Things to consider:
Early repayment charges
If you’re considering paying off your mortgage early, you’ll need to check if you’ll be subject to an early repayment charge and any additional costs. Depending on how much you may need to pay in early repayment charges or fees, it may be beneficial to speak to a mortgage adviser to discuss the best way to approach repaying your mortgage.
Tax implications of pension withdrawals
Gathering a lump sum to pay off your mortgage can be tricky, and some people choose to turn to their pension fund to help them out. If you are looking to withdraw a lump sum from your pension, you’ll need to consider the tax implications and what this might mean for your pension pot in the future. We recommend you speak to a financial adviser before withdrawing from your pension fund to help understand the implications and impact this may have.
Any existing debts
When you’re considering paying off your mortgage, it’s important to consider any other debts you may have and prioritise which loan should be paid off first. You should consider paying off larger loans with higher interest rates first.
Your plans for retirement income
As you look to the future and consider your plans for retirement, you’ll need to consider the income you will rely on and how this may be impacted depending on your decision.
If you choose to use equity release to clear your mortgage early, your entitlement to some means tested benefits may be affected, including state pension credit. Keeping money in a pension fund may offer better long-term growth compared to paying off a mortgage, so it is important to consider financial advice based on your individual circumstances.
Can you use equity release to pay off your mortgage?
Yes, equity release can be used to pay off your existing mortgage and any secured loan. Using equity release can allow you to release tax-free cash from your home without the commitment of monthly repayments.
However, it is important to understand and consider the impact of equity release before making any decisions. Speak to an independent equity release adviser to learn more about your options today.
How Equity Release Works
Equity release is a way of releasing the equity stored in your home in the form of tax-free cash. The amount of equity you have in your home is equal to the value of your property, minus any outstanding mortgages or debt secured against it.
By releasing equity from your home, you will be able to receive your funds in a lump sum or in a drawdown facility to access in the future.
There are two main types of equity release that you may consider if you are seeking to use equity release to clear your mortgage, a lifetime mortgage or a home reversion plan.
Lifetime mortgage
A lifetime mortgage is a type of loan secured against your home, however unlike traditional mortgages, you are not expected to make monthly repayments. An interest-only mortgage allows retirees to pay only the interest, helping to manage costs while staying in their home.
There are a few types of lifetime mortgages, each designed to suit different circumstances including an enhanced lifetime mortgages, ideal for people with poor health or certain lifestyle factors.
With a lifetime mortgage, you can choose to make monthly interest payments, which can help manage the loan balance over time.
Your lifetime mortgage, and any interest that has accrued, will be paid off when you pass away or move into long term care.
Home reversion plan
A home reversion plan allows you to release equity from your home through the sale of part or all of your property to a provider at a discounted rate. You will be able to remain in your home ‘rent-free’ until you pass away or move into long term care.
This will then be repaid when you pass away or move into long-term care, often through the sale of your home where the provider will reclaim the percentage sold at market value.
Eligibility and Suitability for Equity Release
Equity release can be a viable option for homeowners aged 55 and over who are looking to unlock the value in their property to supplement their retirement income. However, it’s essential to understand the eligibility and suitability criteria for equity release before making a decision.
It is always important to discuss your options with a qualified equity release adviser when considering equity release to clear your mortgage, as they can provide guidance on the implications on your personal circumstances and retirement plans.
During your discussions with an equity release adviser, your existing loans and debt in addition to your overall personal circumstances will be reviewed to help create a personalised recommendation of what we believe is the best choice for you, this will not always include equity release.
The pros and cons of using equity release to clear your mortgage
Releasing equity from your home can come with a range of pros and cons, your adviser will discuss these in detail and what this may look like on your personal circumstances. Additionally, individuals over 60 often face challenges with their mortgage payments, making it crucial for lenders to assess their financial situation when extending mortgages into retirement.
The pros
- Equity release comes with a set of safeguards through the equity release council meaning you’ll have the right to remain in your property ‘rent-free’ until it is time for the loan to be repaid.
- You will have a ‘no-negative equity guarantee’ meaning that you and your estate will never owe more than the value of your home.
- Equity release can be used for lots of things so if you have any additional debt on-top of your mortgage you could use your equity release towards this.
The cons
- Equity release plans are not usually intended to be repaid early which means if you wish to end the plan early, you may be subject to financial penalties including early repayment charges.
- The value of your estate will reduce and the amount you can pass on in inheritance via your estate will therefore also decrease.
- Releasing equity can affect your entitlement to means tested benefits including universal credit
Understanding the safeguards of equity release
As members of the equity release council, we adhere to their strict code of conduct that includes a number of safeguards and guarantees for customers. This also means we will only recommend Equity Release Council plans, so you can move forward with confidence, understanding we put your best interest first.
Learn more about the safeguards of equity release and how this impacts the products we recommend.
Considering the alternatives to equity release
Equity release is not always the right option, fortunately, there are some alternatives to using equity release to clear your mortgage.
The alternatives to help clear your mortgage can include:
- Overpayments to reduce the term of your existing mortgage
- Switching to a different mortgage plan or provider
- Using investment returns or lump sum payments to clear the debt sooner
- You can consider downsizing
- Using other financial products to clear your mortgage
Should you wish to explore your options, our specialist mortgage advisers are available to provide personalised advice in more detail.
Chat to our specialist advisers to get started
Equity release isn’t always the right option, however if you’re seeking to clear your mortgage our specialist equity release advisers can discuss your options.
Offering no obligation, whole of market advice, our team will work with you to find out if equity release is the right option for you and what is available to help you clear your mortgage faster. We’ll work with you so you can make a clear, informed decision whilst understanding the equity release process.
Get started today with our equity release calculator to see how much you could release from your home.
Frequently asked questions
What is the average mortgage term in the UK?
Historically, a 25 year mortgage term was the most popular, however 30 and 40 year terms are now becoming more frequent as people look to secure a home and keep their monthly payments to a minimum.
At what age should you pay off your mortgage?
Of course, paying off your mortgages early is the ideal situation. There is no set rule as to how old you should be by the time your home is entirely owned by yourself, but in general terms, paying it off before you reach retirement age will leave you with less debt and more income as you stop working, thereby allowing you a more comfortable retirement.
Is it hard to get a mortgage at 60 years old?
It is possible to get a mortgage later in life, however the terms may be less favourable. A mortgage lender may possibly look to offer you a reduced term such as 10 or 20 years due to your age or retirement income depending on the lender, which means your monthly payments may be significantly higher than a mortgage over a longer term for a younger person. This is where alternative options may be explored including retirement interest only mortgages and lifetime mortgages.
What happens if you still have a mortgage when you retire?
In short, nothing happens if you step into retirement with a mortgage. However, you’ll still be obligated to make payments and if you need to re-mortgage, you may find this harder with your age as lenders will often look towards shortening the term of your mortgage, potentially increasing your monthly payments.
If you still have a mortgage by the time you retire, you may want to look into ways to pay off the outstanding mortgage balance so you can save money and live comfortably in the golden years of your life.
At Bower Home Finance, we offer no-obligation advice, helping you find the best solution for your circumstances. With whole of market equity release specialist ready to help, we will explain your options in detail and will never recommend equity release if it is not the right option for your circumstances. Request a callback today to learn more about the options available to you.
