Equity Release or Remortgage: Which One Is Better?

After spending a lot of your life completing your mortgage repayments, it’s not surprising that in your later years, you want to find a way to access some of the wealth that’s tied up in your property.

Deciding between equity release or a remortgage can be a challenging decision to make, with both options providing you access to money, while structured in very different ways

In truth: which one is right for you will wholly depend on your personal situation, including your age, income, financial requirements, and long-term plans. But don’t worry – we’re here to help.

In this complete guide, we walk you through exactly what equity release and remortgages are, their key differences,  and the pros and cons of each. Let’s begin.

What Is Equity Release?

Equity release is generally limited to those over the age of 55 and is a mortgage product that allows homeowners to unlock some of the value in their property through equity, without the need to immediately sell or move.

There are different financial frameworks that can be set up for you to access the money, including a Drawdown Equity release or lump sum withdrawal.

There are two main types of equity release available in the UK:

• Lifetime Mortgages
• Home Reversion Plans

The most popular equity release plan is a lifetime mortgage. This type of equity release allows you to borrow money against the value of your home, whilst retaining ownership. Typically with a lifetime mortgage the loan and interest will be repaid when you pass away or move into long-term care.

The other type of equity release is called a home reversion plan. This type of equity release allows you to sell part or all of your home in exchange for a lump sum or regular payments, but you can continue living in the property rent-free.

But how does equity release work in practice?

It is common for people to use equity release in order to supplement their retirement income, pay for home improvements, or help financially support family members.

While we will shortly visit the pros and cons of equity release, it should be noted at this juncture that the main benefit of equity release for most is that you often don’t have to make any monthly repayments, with the loan being paid when you no longer need the money. Naturally, this can provide a huge relief, especially if you’re living on a fixed income.

What Is Remortgaging?

Remortgaging is when you switch your current mortgage for a new one. While this can be achieved either with your existing lender or a new one, should you choose to stay with your current lender, this is typically referred to as a product transfer.

Remortgaging is common practice and is usually completed to secure a better interest rate, consolidate debt, or to release some of the equity in their property.

One of the most frequently asked questions we hear – at Boon Brokers – is “can I remortgage my house to free up some extra funds?”

Simply, the answer to this is yes. As long as you have enough equity and meet the lender’s criteria, you will be able to remortgage and access some of your property’s equity.

With that being said, while remortgaging can help you access extra funds or reduce your monthly mortgage payments, it will require you to prove that you can safely manage the additional regular repayments. This usually means passing income checks, credit assessments, and completing a property valuation. As such, remortgaging might not be the best choice if you’re nearing retirement or have an irregular income.

Key Differences Between Equity Release and Remortgaging

There are some key differences between equity release and remortgage and can be seen most clearly in the way they’re structured, who they’re suitable for, and how they’re repaid.

To make this easier, we’ve create a quick comparison list of the key differences:

To summarise, equity release is typically aimed at older homeowners, especially those who are retired or close to retirement. With this option, you usually don’t have to make monthly repayments, and income isn’t a key factor in your eligibility. The amount you can borrow is mainly based on your age and the value of your property. The loan is usually repaid when the property is sold after death or when you move into care.

On the other hand, remortgaging is open to all homeowners – but will involve more affordability checks upfront. Similar to a normal mortgage, lenders will require proof of income and will assess your current financial standing and ability to make regular repayments. Additionally, the loan is repaid over time, just like a regular mortgage.

While both options allow you to access equity in your home, they serve different purposes and are suited to different financial situations. If you’re asset-rich but cash-poor, equity release might be a better fit. On the other hand, if you still have a steady income and want to borrow more, remortgaging could be the way to go.

The Pros and Cons of Equity Release

As we’ve already noted, there are several benefits to equity release, particularly if you’re wanting to access funds from your property while being able to remain living in your home. In addition, the flexibility allows you to unlock your wealth either in a lump sum or through regular payments, with no monthly repayments required unless you choose to arrange this.

Here are the main pros of equity release:

Pros:

• Access tax-free cash without having to move
• No monthly repayments needed (unless you want to make them)
• You can remain in your home for life
• Flexible options like drawdown facilities

However, nothing in this world is entirely perfect and so naturally, equity release also comes with some downsides.

For example, the interest on a lifetime mortgage can compound and accumulate quickly, especially if you don’t make repayments. This can potentially leave less for your loved ones when your property is eventually sold to repay the equity release loan. There are also means-tested benefits to consider, as receiving a lump sum might affect your entitlement.

Here are the main cons of equity release:

Cons:

• Compound interest can rapidly increase the total owed
• Reduces the value of your estate
• May affect eligibility for means-tested benefits
• Interest rates can be relatively high

The Pros and Cons of Remortgaging

If you’re looking for lower interest rates, access to capital, or want to consolidate debts, remortgaging can be a great option. As long as you have a reliable income and a strong credit history, lenders will generally offer you competitive rates, which can help you save money in the long run.

Here are the main pros of remortgaging:

Pros:

• Potential to secure a lower interest rate
• Access to funds with manageable loan repayments
• Opportunity to consolidate debt
• Access to more flexible mortgage deals

On the other hand, remortgaging also has its drawbacks. As remortgages require consistent repayments, you will need to undergo a complete application process that includes affordability checks with the potential requirement of paying legal and valuation fees.

Additionally, if you’re planning on retirement in the foreseeable future or financial situation has changed since your original mortgage, such as a reduction in income can make getting a remortgage application approved much harder.

Here are the main cons of remortgaging:

Cons:

• Requires proof of income and creditworthiness
• Early repayment charges could apply
• Legal and valuation fees can add up
• May not be suitable if your financial situation has worsened

The Affordability Differences Between Equity Release and Remortgaging

As a remortgage requires an up-to-date affordability assessment, let’s take a dive into exactly what you will need to consider when remortgaging and how this differs from an equity release lifetime mortgage.

Affordability

Affordability is one of the key differences that separates equity release from remortgaging.

With equity release, your income won’t be considered as your affordability is calculated from the value of your property. Additionally, there are usually no monthly repayments as your loan is typically repaid in full after you pass or are moved into full-time care.

For these reasons, equity release remains most popular with retirees who may not have a regular income.

Remortgaging, on the other hand, is more akin to a regular mortgage, and consequently, your ability to manage regular repayments. Lenders will assess your income, spending, and debts before approving your remortgage.

Purpose of Loan

Going hand-in-hand with affordability, the purpose of the loan can play a big part in which option is best for you.

If you’re retired with limited income or funds, finding yourself cash-poor but asset-rich, and are looking for additional income to fund your lifestyle, equity release could be the better option.

However, if you’re still working but require some extra funds for something specific – like home improvements or consolidating debt – remortgaging might be a more cost-effective and manageable solution.

Age and Income

Crucially, equity release will typically only be available to those aged 55+. Whereas, a remortgage will depend directly on your age and income.

Equity release is typically designed for older homeowners, usually 55 and above, who have significant equity but may not have enough income to manage monthly repayments.

Remortgaging is more accessible to younger homeowners who are still working or have a stable and regular income. It is important to note that if you’re retired and rely on a fixed pension, qualifying for a remortgage might be difficult.

Comparing Costs: Equity Release vs. Remortgage

When comparing the cost of equity release with remortgage costs, it’s vital to consider more than just interest rates.

Equity release tends to come with higher interest rates than standard mortgages, and the interest compounds over time. As a result, it is important to understand that the total amount you owe can grow quickly. Notably, there are regulations in place by the Equity Release Council that prohibit you from ever borrowing more than the total value of your property.

While some equity release providers offer flexible repayment options, it can often be a more expensive way to borrow.

Remortgaging will typically involve fewer fees, though you may have to pay early repayment charges on your existing mortgage, arrangement fees for the new deal, and possibly solicitor or valuation fees.

However, many lenders offer fee-free deals or include legal costs as part of the package. In general, remortgaging tends to be the more cost-effective option if you can afford the monthly repayments.

Whether equity release or a remortgage is the right choice for you should always be discussed with a financial expert and equity release broker. At Boon Brokers, our dedicated brokers can take you through all of your options to help find the best mortgage or equity release that matches your need – completely fee-free.

Tax Implications of Equity Release and Remortgaging

A key aspect of both equity release and remortgaging is that the money you receive is treated as a loan and not as income. As such, any money you receive through equity release is not directly subject to income tax.

Seeking Professional Advice: Making the Right Decision

Knowing whether equity release or a remortgage is the right choice for you will depend on variables that only you know, and can be a major financial decision.

That’s why we’re here to help you.

Whether you’re worried about your age, income, retirement plans, or family circumstances, our dedicated equity release brokers can help provide you with all the information you need to help you decide on the right choice for you.

At Boon Brokers, we are a fee-free brokerage, offering impartial advice so that you can find the mortgage deal or equity release that matches your specific needs.

Whether you’re considering equity release or remortgaging – Contact Boon Brokers Today – and we’ll take the time to understand your unique situation and help you make the most informed decision.