Remortgaging or equity release: which is best?

If you need extra cash later in life but you don’t want to have to sell your home, you could remortgage or use equity release.

Both of these options allow you to gain access to some of the value tied up in your property.

In this article, we explain:

• How does equity release work?
• How much can you release? Try a calculator
• What are the pros and the cons of equity release?
• What is remortgaging to release equity from your home?
• Compare mortgages with our tool
• What are the pros and cons of remortgaging?
• How do remortgaging and equity release compare?
• What are the alternatives to equity release?

Read more: Remortgaging: everything you need to know

How does equity release work?

Equity release is a loan that homeowners aged 55 and over can secure against the value of their property in order to get some cash.

The debt is repaid once you die or move into long-term care.

We have much more detail on how it works and the pros and the cons in our guide.

Broadly speaking, there are two types of equity release plan:

• Lifetime mortgages: the more popular type of equity release product. You take out a loan with the provider, usually worth up to 60% of the value of your property.

• Home reversion plans: here you sell part or all of your property to a home reversion provider at below-market value (usually between 30% and 60% of its true value). In return, you get a tax-free lump sum or regular payments.

With remortgaging a lender will factor in your income, but with equity release, how much you can borrow will largely depend on:

• The value of your home
• Your age
• The state of your health

NOTE: if you still have an outstanding mortgage, any money you unlock using equity release must be used to pay your home loan off first.

We list some alternatives to equity release you might want to consider. If you are looking for an equity release provider, check out our independently rated best equity release companies.

Also read how Ian and Gillian‘s lifetime mortgage allowed them to stay in their home and help their son get on the property ladder.

Use an equity release calculator

Use the calculator below to give you an idea of how much money you could release from your home.

Pros and cons of equity release

Equity release is risky, so you should carefully weigh up the pros and cons first.

Pros

• Releases money for you to spend without worrying about monthly repayments
• If your home has increased in value, you can “unlock” that extra cash
• The “no negative equity” guarantee offers some financially security. This means you will never owe more than your home is worth when it is sold.
• There are some flexible plans that allow you make voluntary payments to tackle the interest. With some products, the full loan plus interest can be repaid over a number of years.

We outline some of the top equity release companies.

Cons

Your equity release adviser is obliged to explain the disadvantages to you and should work out if your benefits would be affected.

• Lifetime mortgages have higher interest rates than mainstream mortgages, which means the loan can balloon over time, leaving less for loved ones
• Less of your estate will be left to your loved ones when you die
• It can affect your access to benefits, including financial help from your local authority to cover the cost of care
• Home reversion doesn’t pay the full market value for your home

Find out: What are the costs of caring for an elderly relative at home?

Remortgaging to release equity from your home

Remortgaging means getting a different mortgage deal for your current property. There are a number of reasons why you might want to consider it.

One reason is to access some of the equity in your home. You could arrange a new mortgage deal so that you have a bigger loan than the one you already have.

This is known as remortgaging to release equity and is different to equity release.

Taking on more debt is a big decision which needs to be considered carefully. We have more on how to remortgage to release equity.

Bear in mind that:

• Monthly repayments will go up if you increase your mortgage
• It will take you longer to pay off the loan if you choose to extend the term to lower your monthly repayments

If you are retired or coming up to retirement age then it may not be that easy to remortgage to release equity.

There is no legal limit on the maximum age to get a mortgage, but lenders will impose their own rules.

Speak to a broker to find out more but most lenders want your mortgage term to end once you are 70.

Try our mortgage comparison tool

Use the free tool below to compare mortgages.

Pros and cons of remortgaging

There are a number of benefits and risks when remortgaging to release equity from your home. Here we outline some of them:

Pros

• You might be able to switch to a cheaper or more attractive mortgage product
• You can use it to pay off other more expensive debts
• It means you can stay in your home, rather than selling to release cash

Cons

• Interest rates are rising so you may end up paying a higher interest on a larger mortgage
• A new lender may charge costs to set up the deal and you might have to pay revaluation and conveyancing fees too
• Stretching out your mortgage to a longer timeframe can increase the overall cost
• If you are in your 60s, you may find it harder to get a mortgage deal

How does equity release compare to remortgaging?

You may be able to unlock more cash from your home with equity release than if you were to remortgage. This is because you don’t have to make any monthly repayments. 

By contrast, a mortgage lender will only lend you what you can afford to repay each month from your income. On a reduced retirement income, this might be disappointingly small.

Example: Say you are 58 years old and your home is worth £400,000. You want to raise £70,000. You have an average salary of £35,950 and plan to retire at 68.

How would remortgaging compare to equity release in this scenario?

Remortgaging:

• You would qualify for mainstream remortgaging, rather than “later life” lending, because you are seeking a mortgage before your anticipated retirement age
• You would need to pass remortgaging affordability checks for the entire duration of the loan
• Let’s say you take a two-year fixed-rate repayment mortgage at 1.58%, with no fees and a free legal service. According to Key Group, your monthly payment would be £702
• Assuming interest rates remain constant, then the total to pay over the 10-year term of the mortgage will be just over £82,560. Of course, interest rates can always increase or decrease in the future.

Equity release:

• No affordability checks or arrangement fees and there is a free survey
• You may have to pay an advice fee of £1,500 and a legal fee of £900, according to LV
• With More2Life’s Capital Choice lifetime mortgages, with a 3.29% annual rate, at the end of the first year you will owe £72,302 (including £2,302 of interest).
  • You could voluntarily pay that interest – £191.83 a month
  • You could also pay up to 10% per year – £7,000 – for life on the £70,000 of equity released (an overpayment of £583.33 per month) to reduce the capital lump sum
  • It can maximise what you leave as inheritance
• If you decided to pay the interest and repay that 10% of the capital, you would pay £775.16 a month (£191.83 + £583.33)
• If you don’t pay any of the interest or capital, your original £70,000 loan would have doubled over 10 years, making this a more expensive option than remortgaging.

Is there a better alternative to equity release?

As well as remortgaging, there are other options to raising money in your later years beyond equity release.

We go into these options in more detail here, but to summarise:

• A retirement interest-only mortgage
• Downsizing
• Renting out a room using the government’s Rent a Room scheme
• Borrowing money using a credit card or personal loan

Each option carries with it pros and cons that need to be very carefully considered. It might help to speak to a financial adviser or mortgage broker.

We go into more detail about the different options in our guide on the alternatives to equity release.