Equity Release with a Mortgage

If you are in later life and wish to free up money tied in your property, then Equity Release may be an attractive product for you. You may have read that you need to own your property outright and be wondering if Equity Release is possible with a mortgage.

The good news is that most Equity Release lenders will allow you to release equity with a mortgage. However, there are conditions you need to meet before your application will be accepted.

Let’s explore Equity Release with a mortgage.

What is Equity Release?

Equity Release (sometimes known as a lifetime mortgage) is a mortgage that allows you to borrow money against the equity you currently hold in your property.

Instead of paying monthly payments, the interest can roll up and the loan is repaid when you pass away or move into long term care. You also have the option of making mortgage payments should you wish to service the interest and/or capital of the debt.

How the loan is repaid depends on your next of kin and can be settled by selling the property or, if your next of kin wishes to retain the property, they can pay back the loan from personal funds or money you leave them.

Lifetime Mortgages

There are two types of Equity Release product in the UK. The most common product is a Lifetime Mortgage, which accounts for over 95% of the market.

With a lifetime mortgage a lender may allow you to borrow up to 50% loan-to-value for your property. The capital and interest of the loan is then owed when all mortgage holders die or move into long term care.

Home Reversion Plans

Home reversion plans operate differently to Lifetime Mortgages. Instead of borrowing the money from a lender, you sell a percentage of your equity up front and in return the lender agrees to allow you to live rent free in your property until you die or go into long-term care.

Home reversion providers make their profit by offering an amount far below market rate for your equity. The property is typically then sold when you die or require care for the home reversion plan provider to make a return from the equity they purchased.

Equity Release Eligibility Criteria

To take an Equity Release product you will need to be aged 55 or over, own your property outright (or have a mortgage that can be redeemed by the equity release on completion) and the property must be over the value of £70,000.

Can You Take Equity Release with a Mortgage?

Yes, you can take Equity Release if you already have a mortgage on your property. However, the mortgage will need to be redeemed on completion.

Commonly, in these circumstances the Equity Release provider will stipulate you use the funds to repay your mortgage and then any remaining funds from the Equity Release are yours.

There are many options available when releasing equity with a Lifetime Mortgage. A few options are:

• You may wish to release only the amount outstanding on your mortgage to repay it and free up ongoing monthly income.
• You may choose to release as much Equity as possible to repay the mortgage and have additional funds left over.
• You can also choose how you receive that additional money – either as a cash lumpsum or regular payments.

How Equity Release Works with a Mortgage?

When you apply for an Equity Release product, a lender will check if there are any charges on your property from other mortgage providers.

If there is a mortgage, they will ask for a mortgage statement to ascertain how much is outstanding and whether the Equity Release will cover the amount.

Your Equity Release adviser will ask why you are seeking to release equity and if you are hoping to repay the mortgage and have money left over, they will advise whether this is possible.

At this time, all Equity Release lenders will insist that any outstanding mortgage balance is redeemed on completion. Equity Release providers also refuse to act as second charge lenders.

How Much Equity Release Can You Take?

Each Equity Release lender operates different rules when releasing equity on a property that has a mortgage.

Lenders also operate different thresholds for the percentage of equity you can release. For example, the headline equity release rate you will see advertised is 50% of the property value. However, you are more likely to secure the full 50% if you are older and have a property with enough value to accommodate the interest.

Your Equity Release adviser will be able to determine how much equity you can release based on your personal circumstances and you can choose whether to proceed on that basis.

Can I Borrow More if I Already Have a Lifetime Mortgage?

Yes, in some circumstances you can borrow more if you already have a Lifetime Mortgage. Ordinarily this will be where you have only released a small amount of equity previously and have room to release more equity up to the lender’s maximum threshold.

An Equity Release lender will be concerned about any existing equity release product that you have because it reduces their margin for profit. Because of this, a lender will be cautious about how much more they can extend to you in borrowing.

If you already have a Lifetime Mortgage Equity Release product, you will need to proceed with the same lender to raise further funds. A broker, like Boon Brokers, can process this for you. You can either raise further funds via a further advance or, if you arranged a drawdown facility with your initial borrowing, you can access the remaining funds in the drawdown quickly. Unlike a further advance application, which can be refused by the lender, the lender has to honour a drawdown facility and lend the remaining funds in the facility unless they are insolvent.

How an Equity Release Specialist Will Help

As you might have guessed, Equity Release products are complex financial products with specific guidelines and thresholds applicable depending on your age, property construction, and property value.

90% of the products in the Equity Release market are represented by the Equity Release Council who set out ethical standards and rules around Equity Release. These include protections for you against negative equity and fair lending practices.

Unfortunately, there remains 10% of the Equity Release market that operate outside of the Equity Release Council’s remit and often offer subpar products.

You should ensure that your Equity Release adviser is a member of the Equity Release Council and offers products from lenders on the Council’s panel.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage. Boon Brokers provides fee-free no obligation Equity Release advice.Contact Boon Brokers to to discuss releasing equity with a mortgage today.