More commonly, people inquiring about equity release have an existing mortgage or loan still secured on their home. However, for an equity release scheme to be accepted by the lender, the mortgage or secured loan balance must be fully repaid.
In order to ascertain whether the mortgage can be repaid by an equity release we need to know the valuation of the property & the age of the youngest property owner (minimum age is 55).
Once established, as long as the figure calculated is at least the size of the current mortgage, then the equity release can be applied for. Even in situations where the full mortgage balance cannot be effectively be reached by releasing equity, if the difference can be found by way of additional funds such as existing savings/investments, then the application can still proceed.
The major benefit of being in a position to pay off the mortgage is that no more monthly payments will be required in the future.
This will alleviate any financial pressures of maintaining the mortgage payments maybe at a time of redundancy, retirement through ill-health or severe debt issues.
Potentially, this course of action would avoid the issues of repossession & even incurring an adverse credit record.
Nevertheless, it must be bourne in mind the consequences of this course of action.
Yes there are no more monthly payments, however the interest that would normally have been repaid is instead added to the mortgage balance. This has the effect of an ever increasing debt that effectively doubles every 10-11 years, dependent on the interest rate obtained.
There may be concern that this equation would, & can, have the effect of eroding the value of ones estate, especially given the fall in property prices recently.
However, the optimists amongst us would assume that over the longer term property values will recover & escalate over time.
Effectively this would counter the roll-up effect of the increasing equity release balance. Unfortunately, we would not know the full extent of this & hence the reason for the inclusion of the no negative equity guarantees built into these SHIP regulated schemes.
This ensures that any beneficiaries cannot be saddled with any personal debt, with the worse case scenario effectively being that the lender takes the value of the property; no more.
For these reasons from a lifetime mortgage lenders point of view, they do not permit any second charge as there maybe no security left for the subsequent lender in case of default.
Why a second charge would want to be placed given there maybe no future equity remaining anyway would be a questionable issue.
Therefore in summary, anyone looking at taking out equity release must be able to redeem any existing mortgage with the new lifetime mortgage being the only secured loan on the property.