The equity in your house is the difference between the house’s market value and any debt secured on it. Equity release is a way of accessing some of the cash tied up in the value of your house.
There are many options available to you if you need to release some equity to pay for those things you wish to do in your life now.
How to release equity?
Sell your house
This is about the easiest way of having access to your house’s equity. Once released, this equity can be used as a deposit when buying a new home, which is useful if you’re looking to downsize or move location to somewhere cheaper.
If the equity value is high. You can use this as a large deposit. That means lower mortgage rates going forward, or you can even use it to buy a new property outright.
By downsizing, you will have freed up your equity and have this in the form of cash. After buying your property and ensuring that all associated costs are covered, you pocket what is left to spend or save as you please. The new property is also yours to do with as you deem fit.
As easy as this sounds, there are, however, things to consider when selling your home:
- Cost of moving:
Moving is more than just the cost of sale and/or purchase of a property. A portion of the proceeds from the sale are needed to settle legal fees, estate agent fees, stamp duty and even moving costs, so bear this in mind.
All of these when totalled could end up being pretty substantial and what is left after the purchase of this property and/or before the settlement of these fees might be negligible.
- Emotional distress:
More than just financial costs. There might also be emotional costs attached to moving. This is especially true if you have lived in your home for some time and there are people, family moments, memories and other sentimental attachments that might have been created there that would have to be left behind.
It is important to give yourself enough time to emotionally detach where necessary and to be objective in deciding to do what is best for you overall.
Here, you are essentially borrowing against the value of your home equity. This works by taking a new mortgage that is larger than the existing one.
For example, if the value of your home has increased from £300,000 to £400,000 since you took out your old mortgage, remortgaging your home helps you cash in on this increase in market value. If you owed £200,000 to your old lender but you then get a new mortgage of £240,000, you would be left with £40,000 extra cash.
However, there are fees that might reduce this, such as fees incurred by the arrangement of the new mortgage.
By remortgaging your property for a higher value, you would have lost £40,000 of your equity as you would now own only £160,000 of the £400,000 value of your home rather than the £200,000 it would have been if you hadn’t remortgaged.
Before remortgaging, however, there are certain things to consider:
- Your equity:
Calculate the value of your home against how much mortgage you owe to know how much equity you have. Also, if you are planning for your home to further increase in value, so as to avoid increasing your mortgage size, you are taking a risk. The fact that property prices have gone up in previous times does not mean they will necessarily stay on the rise.
- Cost incurred:
Consider the size of your current mortgage repayments and that of the potential new repayments to see if you can manage larger monthly expenses.
It’s particularly important to ensure you have no problems with the size of your new mortgage repayments as you may lose your home if you are unable to keep up with the repayments.
Also take into account any exit fees that may be incurred when exiting your current mortgage as well as arrangement fees needed for the new mortgage, keeping in mind that if substantial, these could mean less equity available for you.
- Home Reversion Plan:
You can sell your home or a share of it in exchange for a lump-sum of cash.
In this case, the lender buys a share of your house and waits for its value to increase. But because the lender’s money won’t be repaid until your house is sold, the amount the company makes available to you is usually below the actual value of the share.
One perk of this is that you are basically living in your house rent or mortgage free for the rest of your life, or at least until you move to a care facility.
- Lifetime Mortgage
In this case, the loan given comes with fixed interest but this loan does not have to be repaid in periodic instalments. A lifetime mortgage can be of different 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: in this case, your interest is rolled up. Instead of being repaid monthly, the rolled-up interest and the actual loan is repaid when your house is sold.
- Retirement Mortgage: this is a type of lifetime mortgage that bridges the gap between a traditional residential mortgage and an equity release plan. This mortgage type is secured against your home but is only repaid after the property is sold.
Things to consider
Before going ahead to release the equity in your home, there are things to consider. Some of these are:
- Consider available alternatives. Since the main aim of equity release is to have access to cash stored up in your property, alternatives like claiming all available benefits that are owed to you, using existing savings and investments and getting home improvement grants, among others, might provide the money needed to suit your needs.
- Equity release could affect your tax position as well as your entitlement to benefits like income support.
- Consider the possibility of losing your home as this is likely to happen if you don’t make remortgage repayments.
- The value of your house can increase or decrease in future. Releasing equity on your house might affect the amount left to you when this change in value happens.
- Releasing equity decreases the overall value of your estate and this will affect the amount of inheritance you will be leaving behind. Is this a risk you want to take? Or, do you want your personal/present needs to have higher priority?
There are many options available to you if you need to release some equity to pay for those things you wish to do in your life now. But as with all things, there are risks and benefits attached to all. If you are unsure which might be the best option for you, seek advice from a professional financial adviser and take your time before making a decision which could affect you for years to come.