With house prices reaching a record high in January, many homeowners around the UK will have far more money tied up in their homes than they did before. In fact, house prices have climbed £24,500 over the past year alone. Yet, with the cost of living also skyrocketing, being able to free up some of that money could help with rising food, fuel and energy costs.
To help give you an idea of whether releasing equity could be a good idea for you, we’re going to weigh up the pros and cons of taking money out of your home.
What is equity?
The equity in your home is the amount of it you own outright. It’s the difference between the property’s market value and the amount you have left to pay on your mortgage. You may have heard of this difference referred to as the loan-to-value ratio (LTV).
For example, if you paid a £20,000 deposit on a £200,000 house, the LTV would be 90% and the equity would be £20,000.
However house prices also have a part to play here. Because if, say, your property value increased to £250,000, your equity would become £70,000 and the LTV would be 72%. If you’d also paid off a bit more of your mortgage in the time it took for your house’s value to increase, then your equity would be even higher and the LTV lower.
How do I release equity?
Your options for releasing equity really come down to your individual circumstances. Generally, however, age has a big influence on your options.
If you’re under 55, you’ll need to remortgage to release equity. This involves arranging a new mortgage deal with a higher LTV than you currently have.
If you’re over 55, you can think about equity release. There are two types of equity release: home reversion and lifetime mortgages.
Although there isn’t a maximum age limit for getting a mortgage, many lenders will need you to have paid back the mortgage by the time you’re 70 or 80 years old. So, if you want to release a lot of equity from your home, remortgaging might not be an option for you.
Releasing equity by remortgaging
To remortgage to release equity, you’ll need to chat to a mortgage broker who will run through your options and let you know whether it’s possible.
If you’ve built up more equity in your home since you bought it, you may be able to remortgage to a deal that has a higher LTV than you have at the moment, allowing you take out some of the money that has built up in your home.
However, like with all borrowing, there are pros and cons that you’ll want to weigh up.
Advantages of remortgaging to release equity
- You may be able to borrow up to 95% of your property value
- Depending on your retirement age, you may be able to spread the cost over 35 years
- You could use this amount for a number of things such as home improvements or paying off other debts
- You won’t need to keep track of more monthly repayments on top of your mortgage
Disadvantages of remortgaging to release equity
- You’ll be increasing the size of the loan against your home
- If you increase the size of your LTV, you might not get as good a mortgage rate meaning higher monthly repayments
- If house prices fall dramatically, you could go into negative equity (where the size of your outstanding loan is larger than the property value)
- You may have early repayment charges if you are still tied into a product with your current lender
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Want to chat through your options with one of our partner’s qualified mortgage advisers? Get in touch with them and one of their team will be happy to help.
Alternatives to remortgaging to release equity
If you’re looking to borrow a large amount and you’re not close to the end of your current mortgage deal, one option is a homeowner loan.
A homeowner loan is also called a secured loan or second-charge mortgage. You don’t need to remortgage to take out a homeowner loan, it simply sits behind your first mortgage. I
t’s another way to borrow against the value of your home (just like you are by releasing equity), but you can avoid any early repayment charges that might come with remortgaging. You might also be able to keep a lower rate on your mortgage.
With a homeowner loan you can:
- Borrow from £5,000 to £500,000+
- Spread the cost over 1 to 30 years
- Get advice on your best loan option
- Be considered with any credit profile
However, you’ll need to bear in mind that:
- You’ll be securing a loan against your home
- Missing monthly repayments could negatively impact your credit score
- The lender could repossess your home as a last resort if you can’t repay your loan
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Think a homeowner loan sounds like a good option for you? Quickly and easily check your eligibility online now.
Releasing equity by equity release
If you’re a homeowner aged 55 or over, equity release is a way to take some of the tax-free cash out of your home. There are two different types of equity release that you can consider, and both come with pros and cons you’ll need to weigh up carefully before deciding whether it is right for you.
Equity release will reduce the value of your estate and may affect your entitlement to means tested benefits.
Equity release with a lifetime mortgage
What is a lifetime mortgage?
A lifetime mortgage is a loan secured against the value of your home. You don’t need to make any monthly repayments, however it is often advised to make repayments if you can. This is because any interest built up is added to the value of the loan, which can quickly increase over time.
How much can I borrow with a lifetime mortgage?
It’s possible to borrow a maximum of 60% of your property’s value, however how much you can actually borrow will depend on your age and the value of your home. Your property will need to be worth at least £70,000 to qualify for equity release.
How is the money paid out?
You can receive the money from equity release either as a lump-sum or you can receive an initial smaller sum of money with the ability to take out more in future if you need to. This is known as a drawdown option.
How does a lifetime mortgage work?
When you die or move into long term care, the plan comes to an end. Your home will be sold and the value of the loan, plus the roll-up interest, will be repaid. Any money left over will go to your estate.
Lifetime mortgages that meet the Equity Release Council’s standards will come with a no negative equity guarantee. This means that your estate won’t ever have to pay back more than the property is worth to the equity release provider.
You can also choose to ring-fence a portion of your property for inheritance.
A lifetime mortgage is a loan secured against your home. You should always think carefully before securing a loan against your home.
Equity release with a home reversion plan
What is a home reversion plan?
A home reversion plan is where you sell a share of your home to a home reversion plan provider. You’ll usually receive about 20% to 60% of the market value for the part you sell.
How is the money paid out?
You can either receive the released equity as a lump sum or in regular payments, like an income.
How does a home reversion plan work?
Once you’ve sold part of your property, you can continue to live in the property rent-free until you die or move into long term care. You’ll be responsible for the upkeep of your home while you remain there.
When you move on, your home will be sold, and the proceeds will be split between your estate and the home reversion provider based on the percentage of the home they own.
You can sometimes ring-fence a percentage of your property to protect its value for inheritance purposes.
What are the advantages of equity release?
- Equity release gives you access to a large sum of money in later life, when you may no longer be able to apply for a traditional loan or mortgage
- You can supplement your retirement income
- You could provide financial support to loved ones, clear other debts or fund long term care costs
- The money you receive is tax-free
What are the disadvantages of equity release?
- With a lifetime mortgage, the interest on your loan will compound. As there is no end date to this, this could build up over time if you live longer than expected
- Lifetime mortgage rates are often higher than regular mortgage interest rates
- You often have to pay arrangement fees, usually from £1,000 to £3,000
- With a home reversion plan, you won’t get anything close to the market value for the part of your property that you sell
- You’ll still need to be able to maintain your home
- The income you receive from equity release can affect your eligibility for state benefits
- The amount you are able to pass on to your loved ones as inheritance will be affected
- It can be difficult to change your mind once you’ve set up an equity release plan and early repayment fees may apply
What are the alternatives to equity release?
If equity release isn’t right for you, you could think about moving home or downsizing to raise the funds you need. This could help to protect the size of your estate while still giving you access to the cash you need.
However, it’s also important to factor in the costs associated with moving home and whether it is right for you and your family.
What should I consider before releasing equity?
If you’re thinking about releasing equity from your home, you’ll need to carefully weigh up all your options before you decide on what is right for you. Here are a few things to think about before you commit:
- If you’re borrowing more money against the value of your home, you’ll still need to pay it all back down the line
- Equity release plans are a lifelong commitment, so you need to be sure it is right for you
- Discuss the decision with your dependants. Releasing equity will devalue your estate, which could mean less inheritance for them in the future
- Make sure you’ve thought about all other means of raising the funds you need before you decide. This will help make sure that you’ve made the right decision for you and your circumstances
With so many ways to release equity, it’s really important to think about all your available options.
If you want to check what your borrowing options are, you can find out now by checking your eligibility with us in just a few minutes. Our eligibility check is free and won’t harm your credit score.
If you want to check in with your mortgage options, our partner Cream Financial Solutions will be happy to help.
