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If you’re a homeowner aged 55 or over, you’ve probably heard about equity release and traditional mortgages as ways to access money from your property. But what’s the actual difference between equity release and mortgages? Many people find this confusing, especially since both involve borrowing against your home.
The truth is, these two financial products work in very different ways. Understanding the difference between equity release and mortgages could help you make the right choice for your retirement plans. Whether you’re thinking about home improvements, supporting family, or simply boosting your retirement income, knowing which option suits you best is essential.
In this guide, I’ll talk through the key differences in plain English, so you can make an informed decision about your financial future.
What is a Traditional Mortgage?
Let’s start with what most people are familiar with. A traditional mortgage is a loan you take out to buy a property or borrow against one you already own. You make monthly payments that typically include both the amount you borrowed (the capital), and the interest charged by the lender.
Most residential mortgages run for a set period, usually between 25 and 35 years. During this time, you gradually pay off the debt. By the end of the mortgage term, if you’ve kept up with payments, you own your home outright.
There are different types of mortgages available. With a repayment mortgage, your monthly payments reduce both the interest and the capital. With an interest-only mortgage, you only pay the interest each month, and the original loan amount remains the same until the end of the term.
Banks and building societies assess whether you can afford a traditional mortgage by looking at your income, expenses, and credit history. They want to be confident you can make those monthly payments reliably.
What is Equity Release?
Equity release works differently. It’s specifically designed for homeowners aged 55 and over who want to access the wealth tied up in their property without having to move house.
The most common type of equity release is called a lifetime mortgage. With this option, you borrow money secured against your home, but you don’t usually have to make any monthly repayments. Instead, the interest is added to the loan amount, and the whole debt is repaid when your home is eventually sold – typically when you pass away or move into long-term care.
You remain the owner of your property throughout. You can live there for as long as you want, and all Equity Release Council-approved products come with a ‘no negative equity guarantee’. This means you’ll never owe more than your home is worth, protecting you and your family.
Unlike traditional mortgages, equity release doesn’t require affordability checks based on your income. The amount you can borrow depends on your age, your health, and the value of your property.
Key Differences Between Equity Release and Mortgages
Now let’s look at the main differences between these two options side by side.
Age Requirements
Traditional mortgages are available to adults of any age, though some lenders have upper age limits for when the mortgage must be repaid. Many high street lenders want mortgages paid off by the time you reach 70 or 75, although some specialist lenders now lend into later life.
Equity release is available to people aged 55 and over who own their home. The older you are when you take out a lifetime mortgage, the more you can typically borrow.
Monthly Repayments
With a traditional mortgage, you must make monthly payments. Missing these payments can put your home at risk of repossession.
With equity release (specifically lifetime mortgages), monthly payments are optional. Most people choose not to make any payments at all. The interest rolls up and is added to the loan. Some lifetime mortgage products do allow you to make partial or full interest payments if you wish, giving you more control over the debt.
How Interest Works
On a traditional repayment mortgage, your monthly payments gradually reduce the amount you owe. The interest is calculated on a decreasing balance, so you pay less interest over time.
With equity release, if you’re not making payments, the interest compounds. This means you’re charged interest on the interest that’s already been added to your loan. Over many years, this can significantly increase the total amount owed. However, the ‘no negative equity guarantee’ ensures the debt can never exceed your property’s value.
Loan Term
Traditional mortgages have a fixed end date. You know exactly when the mortgage will be paid off if you keep up with payments.
Equity release doesn’t have a fixed end date. The loan continues for your lifetime and is only repaid when your home is sold, usually after you pass away or move into permanent care.
Affordability Checks
Lenders offering traditional mortgages must check that you can afford the monthly repayments. They look at your income, regular expenses, and existing debts.
Equity release providers don’t carry out the same affordability checks because there are typically no monthly repayments required. The lending decision is based primarily on your property value, your age, and sometimes your health.
Impact on Inheritance
With a traditional mortgage, if you’re making regular repayments, you’re gradually building equity in your home. When the mortgage is paid off, the full value of your property can be passed on to your beneficiaries.
With equity release, the debt grows over time if you’re not making payments. This reduces the amount of equity left in your home, which means there may be less inheritance to leave to your family. However, you can choose inheritance protection options that guarantee a percentage of your home’s value will always be preserved for your loved ones.
When Might a Traditional Mortgage Be Right?
A traditional mortgage might suit you if you’re still working or have a good income in retirement, and you’re comfortable making monthly payments. If you want to keep your debt under control and preserve as much inheritance as possible, making regular payments is the most cost-effective option.
Some people in their 50s, 60s, or even 70s successfully take out traditional mortgages or remortgage their properties. Specialist lenders now consider applications from older borrowers, especially if you have pension income or other reliable retirement funds.
Traditional mortgages can work well if you need to borrow for a specific purpose and can afford to pay it back over time without it being a burden.
When Might Equity Release Be Right?
Equity release might be more suitable if you have limited income but significant equity in your home. It’s particularly helpful if you don’t want the worry of monthly payments or if you wouldn’t pass the affordability checks required for a traditional mortgage.
Many people choose equity release to fund home improvements, help family members with house deposits, clear existing debts, or simply boost their retirement lifestyle. Because there are no mandatory monthly payments, it can provide financial breathing room.
However, it’s essential to understand that the debt will grow over time if you’re not making any payments. This could significantly reduce the inheritance you leave behind. Always discuss your plans with family members so everyone understands the implications.
What About Retirement Interest Only Mortgages?
There’s actually a third option that sits between traditional mortgages and equity release: Retirement Interest Only (RIO) mortgages.
With a RIO mortgage, you make monthly interest payments, so the debt doesn’t grow. However, you don’t repay the capital until the property is sold. This gives you more control over the total amount owed compared to equity release, but you need sufficient retirement income to cover the monthly interest.
RIO mortgages can be a good middle ground if you want to access equity but can afford to make some regular payments. Learn more about Retirement Interest Only mortgages on our services page.
Making the Right Choice for Your Circumstances
Understanding the difference between equity release and mortgages is just the first step. The right choice depends entirely on your personal situation, your income, your age, your property value, and what you want to achieve.
Some questions to ask yourself include:
- Can you comfortably afford monthly payments?
- How important is preserving inheritance for your family?
- Do you have sufficient income to pass affordability checks?
- How long do you plan to stay in your home?
- What do you need the money for?
There’s no one-size-fits-all answer. What works perfectly for one person might not be suitable for another.
Getting Professional Advice
Because these are complex financial products with long-term implications, it’s vital to get professional advice before making any decisions. A qualified advisor can assess your individual circumstances, explain all your options clearly, and help you understand the benefits and considerations of each route.
At Jane Jackson Financial Solutions, I specialise in helping homeowners aged 55 and over navigate these choices. Whether a traditional mortgage, equity release, or a RIO mortgage is right for you depends on your unique situation, and I can help you work through the options in a friendly, no-pressure consultation.
I always encourage clients to involve their family in these discussions. Your adult children are welcome to join our meetings so everyone can ask questions and understand the implications together.
Key Takeaways
- Traditional mortgages require monthly repayments and have fixed end dates, while equity release typically doesn’t require any payments
- Mortgages are available at any age but may have upper age limits, while equity release is only for those aged 55+
- With mortgages, you gradually pay down the debt; with equity release, the debt usually grows over time
- Mortgages require affordability checks; equity release is based mainly on property value and age
- Both options let you access your property’s value, but they work in fundamentally different ways
- The right choice depends on your income, age, goals, and how important inheritance preservation is to you.
Frequently Asked Questions
Can I have both a traditional mortgage and equity release at the same time?
Having a lifetime mortgage means that you can only have one mortgage, however, you can use it to pay off an existing mortgage. Many people do this to clear their monthly mortgage payments and free up their retirement income. The equity release then becomes the only loan secured against your property.
Will I still own my home if I take out equity release?
Yes, you remain the legal owner of your home with equity release (specifically lifetime mortgages). You can live there for as long as you want, make improvements, and even move to a different property if you wish (subject to the lender’s approval of the new property). This is different from home reversion plans, where you sell part or all of your home. I specialise in lifetime mortgages rather than home reversion plans.
Ready to Explore Your Options?
Understanding the difference between equity release and mortgages is an important first step, but nothing beats getting personalised advice for your specific situation.
If you’d like to discuss your options in a friendly, no-obligation consultation, I’d be happy to help. I can visit you at home in Staffordshire or arrange a video call if you’re further afield.
Call me on 07990 836455 or get in touch here to book your free consultation.
Important Information
A lifetime mortgage is not suitable for everyone, and it is important to seek financial advice before taking any action. All other options available should be explored before choosing equity release.
Interest is charged on both the original loan and the interest that has been added, the amount you owe will increase over time, reducing the equity left in your home potentially to nothing. Please discuss with your family and beneficiaries.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
Jane Jackson Financial Solutions is a trading name of Just Mortgages Direct Limited, an appointed representative of The Openwork Partnership – one of the UK’s largest Financial Advice networks with over 4,500 advisers nationwide.
