Can I Release Equity to Pay Off Debt?

Podcast approved by The Openwork Partnership on [xx/xx/xxxx].

What do we mean by debt here?

Most people in life have got some debt – mortgages, loans, car finance, credit facilities or store cards. There are many different types of debt. Some debts become more serious than others, and people do fall into a lot of debt.

Debt consolidation is aimed at people who have got to the point where their debts are becoming unmanageable. They need to do something about it because they are struggling with the cost and that’s affecting their daily lives.

What types of debt can be paid off with equity release? How does it work?

Debt consolidation is quite complex – you’ve really got to analyse that, even with a standard mortgage. We need to bear in mind that equity release is a debt too. A lifetime mortgage is a debt for life.

What we’re talking about is replacing one set of debts with another one. That’s known as debt consolidation.

The big differentiating factor is whether these are unsecured or secured debts. An unsecured debt is something you owe that has no bearing on your property, like a credit card. If you don’t pay that back, you’ve got issues, but the lender doesn’t have an automatic right to take your property from you.

Whereas a mortgage is secured against your property. Your house is put up as security against that debt.

It’s quite common for people to have an interest only mortgage that’s coming to an end – you need to pay it off or sell the house to repay it. Some people look to equity release to help pay off that mortgage. The equity release lifetime mortgage allows you to stay in that property for the rest of your life or until you go into long-term care.

But with equity release you can’t have any other secured debt. You can’t have any mortgages outstanding.

How do I know if I’m eligible for equity release to pay off debt?

Every case is different, but if you’re over 55 and the property is your main residence, technically you’ll be eligible. Your property also needs to be suitable security for equity release.

People don’t just use equity release for one thing. They might pay off a mortgage, fund some home improvements, clear some credit cards and use some for holidays.

I have an interesting example where a client was struggling to pay off their credit cards. Their income was very low and their spending was very high. Generally, if you could manage a debt without equity release, that’s a better option.

This is where it gets complex. We’ve got to look at the debt and the cost of it. Was it good advice for me to advise that client to pay off their credit cards using equity release? This poor guy had had the same outstanding balance on his credit cards for three years. He’d not managed to get the debt down at all, and it was several thousands pounds in size.

The cost to him was astronomical and it was impacting his ability to live. He used equity release to pay off his mortgage and his credit card. Immediately he was about £400 a month better off.

But when customers generally seek equity release to repay credit cards, I’ll ask why they would take a debt that is not secured on their property and then put it on their home. They have to pay that interest for the rest of their lives. If they are already managing that payment, it’s not the end of the world. They could just get it paid off over a couple of years.

What should I consider before using equity to pay off debt?

If you watch Martin Lewis on the television, he’s always talking about this – if a loan is costing you 5% and another debt is costing you 3%, make sure you’re paying off the 5% loan faster than the 3% one.

I’m not a debt adviser, but when I’m talking to people the conversation often turns to their debt. What does shock me sometimes is the way people disregard the cost of a debt. They might have five credit cards and they’re paying off the one with the lowest interest rate.

I guess this isn’t something we learn in schools. A lot of people are good at what they do at work, but not when it comes to their finances. You need to consider that debt and how long it will last. You wouldn’t consolidate a debt that’s got less than a year to go.

The advantage of paying off debts with equity release is to clear really high interest rates. The disadvantage is you’re taking on debt in a different form – it’s a question of how that debt then impacts on you.

A lifetime mortgage is a debt itself. As with any lifetime mortgage, we consider what you want to do with your estate. Do you want to leave money to your children? It’s nice to clear that debt and not worry about it, but if you don’t make any payments on that equity release mortgage it will impact your estate.

Generally, when we help with debt consolidation on any type of mortgage we consider all the factors – income, expenditure and what the debts are. But we also see if they have done this before. If somebody’s prone to consolidating debt, it might not be a good thing for them to do. They’re essentially taking on more and more debt.

I have said to certain people that I’m not prepared to do that consolidation. They’ve done it twice already and it hasn’t worked. They’re now in a worse position than they were. In one case I advised a client to sell her house, clear her debt and get on top of it. And that’s what she did.

Do you have to pay off a debt consolidation loan when taking equity release?

If you take out a lifetime mortgage you don’t have to pay off the debt consolidation loan.

The thing to consider is what the debt consolidation loan is costing you and the equity release mortgage cost. You’d weigh up whether it’s best to pay off the debt consolidation loan or not.

If you’ve got a debt consolidation loan on a 20% interest rate and you can borrow money on equity release at 8%, that can make sense, especially if you can make interest payments on the mortgage. Lenders will allow you to pay off that debt consolidation loan when taking out equity release.

Do you have to repay a debt management plan (DMP) when taking equity release?

Please note that situations can change, so the advice we give today might not be the advice we’ll give tomorrow, depending on what lenders allow. It might change.

Plus, the providers are all different and take various approaches to things. But with a DMP, most providers would want that to be repaid.

So while you don’t have to pay off a debt consolidation loan because that’s a straightforward loan in the background, a debt management plan could have further ramifications. It could impact you later down the line if you don’t make payments.

Lenders are not keen to have that in the background, so they won’t allow a debt management plan to run – it would need to be paid off.

Is equity release an expensive way to consolidate debt?

Not necessarily, as you don’t have to make any payments. If it was a standard mortgage, you’re taking on another debt where you have to make the monthly repayments. With equity release, you don’t have to pay it back.

So that might be the resolution somebody needs. If they have consolidated the debt twice and can’t cope with it, equity release could well be something to look at.

If I do debt consolidation for anybody, I provide them with two illustrations. These show you the terms of the mortgage, the financials and the interest rate and how it impacts over time. If someone is thinking about paying off credit cards, I would have one illustration where you’re borrowing enough money to pay off the credit cards, and a second illustration where you’re not paying them off.

That will show you the total cost of putting a £30,000 credit card debt on a lifetime mortgage, and what would happen to that £30,000 in the next fifteen years if you don’t repay it. That way, you can make an informed decision.

Lots of people do debt consolidation. Equity release could be a very expensive way of doing it, especially if you’re only taking it to cover your debt. But if you are paying back debt but also doing up the house, going on holiday etc, it could make more sense. Either way, I always demonstrate to a client the difference between putting their credit cards on the lifetime mortgage, or not.

What else do we need to know about equity release and debt consolidation?

Every situation is different. If somebody gets in touch with me about debt consolidation I won’t have an immediate answer. It would take me time to review that customer’s finances, go through the situation, look at the lenders and work with the client to evaluate and advise the most appropriate thing for them to do.

I’m not a debt advisor, but we can talk about the basic mechanics of interest and what you could look at doing – or not. Equity release can have bad press, but I would prefer somebody to come to me and talk to me and make an informed decision, rather than not having understood it.

It can be frustrating when a client won’t consider a lifetime mortgage – they’ve already decided it’s bad – but they don’t really know how it works. We never push people to take equity release. We help the client consider all the options to make the right decision.

I’m always happy to spend time with somebody that decides not to do equity release. It can help a lot of people, but it isn’t always the answer. It’s equally rewarding when a client says you’re the only person that’s ever stopped and listened to them. They feel that life has become a disaster – but now they have some options. I get job satisfaction out of helping that person, whether I’m going to get paid for it or not.

I speak to lots of other advisers and the frightening thing at the moment is that they are all seeing more and more clients with serious debt. It’s becoming more challenging to help them.

Equity release may be a solution. It may not. It may be a partial solution – but look at all your options and make your decision from there.

Equity Release & Lifetime Mortgages will reduce the value of your estate and can affect your eligibility for means tested benefits.

Approved by The Openwork Partnership on [xx/xx/xxxx].