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Is using equity release to pay off your mortgage a good idea?

The pros and cons of clearing mortgage debt with your home equity.

Using equity to pay off your mortgage might free up your finances.

If you’re looking forward to the freedom of retirement, you probably don’t want to be tied down to monthly mortgage payments when you could be using your money for things that matter more to you. Using equity release to pay off your mortgage is one option to consider.

Can you use equity release to pay off your mortgage?

Yes – you can use equity release to pay off your existing mortgage. This might be something you want to consider if you’re worried about being able to make monthly repayments as your income changes into retirement. Especially with the cost of living rising and pension funds and savings accounts not performing as well as they were.

Releasing some of the equity in your home to pay off your mortgage means you can enjoy living there into the future without having to worry about how the cost is impacting your budget every month. However, using equity release to repay an existing mortgage or other debts may cost more in the long-term, so it’s essential to get advice to see if this is right for you.

Should you pay off your mortgage early?

If you can afford to pay off your mortgage before the end of its term, this will reduce the interest that you owe – saving you money on the total amount. But whether you should pay off your mortgage early depends really on the rest of your current finances. Think about the following before you decide:

  • Do you have more expensive debts? If you have outstanding balances on credit cards or an unsecured loan, you should think about paying these off first as they will cost you more overall due to higher interest rates.
  • Is your pension topped up? You should consider the state of your pension first, as increasing your contributions might give you back more money than the amount you’d save in mortgage interest.
  • Can you get a better return on savings? If you can find a savings or investment product that offers a higher return than the interest rate you’re paying on your mortgage, this might be a better option.
  • Will there be exit penalties or early repayment charges? Check the terms and conditions of your current mortgage to see if you will be penalised for paying up early. You’ll need to consider the costs of any additional charges before you make a decision.

Exploring your answers to these questions will help you decide the best approach to paying off your mortgage.

If you’re looking at using equity release to pay off your existing mortgage, you’ll essentially be exchanging one mortgage debt for another so you’ll need to think about the advantages and disadvantages before you make a decision.

Why consider equity release to pay off your mortgage?

Start by asking yourself the following questions about where you are with your money and where you see yourself in retirement – whether that’s cruising the high seas on a holiday of a lifetime, starting a new business or even helping family members get themselves on the property ladder.

Do you have any debts that are costing you more?

If you’ve been in your property for several years, it’s probably increased in value considerably since you took out your mortgage. You can use some of this accumulated equity to pay off your existing debt.

Some of the pros to this approach include:

  • With an equity release lifetime mortgage, you don’t have to make any regular repayments unless you want to
  • The outstanding capital, plus any interest that you don’t choose to pay off, is only paid at the end of the term, which is when you, or the remaining borrower if borrowing jointly, die or move into permanent long-term care
  • Lifetime mortgages usually come with a no-negative-equity guarantee, which means that you or your family will never owe more than your home’s value when it’s sold following death or moving into long-term care.

But to give you the full picture, some of the cons of this approach are:

  • Releasing equity from your home will reduce the value of your estate when you die, affecting the inheritance you can leave to your family.
  • Equity release may cost more in total than other options such as extending the term on your current mortgage or remortgaging – but these options may not be available when you get near or past retirement age.
  • Securing a tax-free lump sum may affect your entitlement to some means-tested state benefits.

Before taking out equity release you should always get professional financial advice. Saga Equity Release, our service provided by HUB Financial Solutions Ltd, is a free advice, no-obligation, no- pressure service dedicated to finding out if equity release is right for you, whatever you want to use the money for.

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How to use equity release to pay off your mortgage.

Firstly, you’ll need to check if you’re eligible and see if you can release enough value from your property to pay off your existing mortgage. You can get an idea of this by using our calculator.

If the amount you can release is lower than your current outstanding mortgage balance, you’ll need to be able to raise the remaining capital as your mortgage needs to be fully paid off before or as part of an equity release arrangement.

You should also check your outstanding balance with your current provider, and check if there are any early repayment charges.

If you have a successful application, your solicitor will transfer the equity you release straight to your original mortgage provider, which will clear your existing mortgage. If there are any funds left over, they’ll be transferred to you separately.

How long does it take to pay off your mortgage with equity release?

Typically, it can take anything between 6-12 weeks to release equity from your home, assuming there are no complications to the application. The process is a bit like buying a house, so it isn’t an instant transaction.

The product available through Saga Equity Release, the Saga Lifetime Mortgage, comes with a Saga Service Promise. This means that Saga Equity Release will aim to have your money released to your solicitors account within 40 working days of your application being received and accepted by Just - the provider of the product (T&Cs apply). This Promise will not apply if you’re using the Saga Lifetime Mortgage to purchase a new property, rather than re-mortgaging an existing one.

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Whether you have questions about equity release or just want to find out more, the expert team are on hand to help.

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More on equity release

For more information and to help you understand equity release a little better visit some of our other articles and pages.