Can I take equity out of my house?

Lone white house with dried grass surrounding with a stick fence

The simple answer to this question is, yes, you can if you meet the eligibility criteria for an equity release product. 

The equity in your home is the difference between its current market value and any loan tied up in it. This home equity can represent valuable savings while also representing a valuable financial tool. 

Equity release has many financial benefits and can mean you are able to access a lump sum of cash to pay for whatever you need it for. You can borrow to consolidate a debt, for health treatments, to pay for a once in a lifetime holiday, to make home improvements or simply to have money at hand for emergency purposes.

Equity release products can sometimes allow for you to make repayments on the interest while you are still living in the house, or more commonly ‘roll over’ the debt until such a time as the home is sold. Whether that be when you move out of the house, or when it is sold after your death. 

Equity release has many financial benefits and can mean you are able to access a lump sum of cash to pay for whatever you need it for.

Common ways to create or increase your home equity

Since equity is the difference between the market value of your house and any debt owed on it, it is possible for your home to have little or no equity, especially when the amount owed on it equals the value of the property.

There are some simple ways to increase the equity in your home.

Mortgage Payments

Make payment on the principal part of your mortgage: when you make payment on the principal part of your home mortgage, the downpayment you make translates to your initial home equity. For instance, buying a property that costs £300,000 and making a downpayment of £100,000, means the equity you have created on this property is £100,000.

Home renovations

Increase the market value of your property. While this increase could be dependent on the location of the property and/or the occurrence of inflation, making improvements and/or renovations to your house can increase its market value, and by extension, the equity in your home. 

This will however depend on how much money you borrowed for the renovation as well as what the market value is after the improvement.

If initially, you purchased your house for £400,000 and you made a down payment of £60,000, what you owe is £340,000. If the market value of your home increases to £500,000, your home equity becomes £160,000 which is the difference between what your house is worth (£500,000) and what is owed on it (£340,000).

Reduce property secured debt

Reduce your home loan debt. Since the equity on your property is directly dependent on any debt secured on it, paying off your home equity loans can help you create equity on your property.

For instance, if you have a loan secured on your home for £20,000 and your home is valued at £200,000, your equity on the house is then reduced by the amount of the outstanding loan. By paying off some (or all) of this debt, the equity available on your house increases.

Tapping into your home equity

You can tap into the equity in your home via several different means. These include;

  1. Traditional Home Equity Loan: Otherwise regarded as a ‘second mortgage’, in this case, the lender gives you a lump sum loan which must be repaid over a fixed period. This period of time is usually dependent on how much equity the house has. Like a regular mortgage, a lender in this case will usually require you to repay monthly.
  1. Home Equity Line Of Credit (HELOC): In this case, you borrow money using the equity present on your home as collateral. The amount of credit given will be dependent on the percentage of your home that is available as equity, and this can be borrowed as you need it instead of all at once as a lump-sum loan.
  1. Home Reversion Scheme: Here, the lender buys a share of your house and waits for its market value to increase. But because the lender won’t be paid until your house is sold, the amount the lender offers to you is usually below the actual value of the share of your house.
  1. Lifetime Mortgage: In this case, the loan comes with a fixed interest rate but the loan does not have to be repaid in regular instalments. This can be of two types:
  • Interest-only Lifetime Mortgage: you can choose to repay the interest each month and then repay the actual loan when the home is sold.
  • Rolled-up Lifetime Mortgage: your interest is rolled up instead of being paid monthly. Along with the actual loan, this rolled-up interest is repaid when your house is sold.
  1. Downsize to a cheaper home: After paying off your entire mortgage, there are no longer debts secured on the property. This lack of debt means the equity in your home is the same as its market value. To access some of this money, you can buy a cheaper house. For example, if your house is worth £350,000 and you owe nothing on it, selling it at the same price and buying a cheaper property for £150,000 means you have £200,000 to do with as you please.

Benefits of taking out equity of your home

  1. Better interest rates: A home equity loan acts as a second mortgage as it is secured by your home.  Since you are using your home as the collateral, the lender’s risk is reduced. This reduction results in interest rates that are generally lower than that on a personal loan and/or credit card.
  2. You can use the cash for whatever you need.
  3. You can spread the cost over a longer period than a personal loan allows. This makes repayment easier and with lesser burdens on you.
  4. You are able to stay in your home for the rest of your life.

Risks of taking out equity of your home

  1. When house values change, your loan remains constant. This means, if the value decreases, there is a risk of having a debt that equals the value of your home.
  2. If you take out a Lifetime Mortgage, with no repayments until the house is sold, the interest can increase at an alarming rate. This could mean that roll-up schemes can wipe out a huge chunk of the value in your property if you live for a long time, and can affect how much of your estate is able to be passed on to those you wish to name as beneficiaries in your will.  
  3. Your home is usually the collateral of a home equity loan. In the event that you are unable to make the repayments as agreed, you might lose your home. 

So, in answer to the original question; yes, you can take equity out of your house but after careful consideration of the above, you might want to ask yourself “do I want to?”

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