When people are looking to access the equity that has accumulated in their property, they have a number of different options. Selling the property is one option but if the homeowner wants to remain living in the property, then they would have to look at other solutions. The two main options would therefore be remortgaging or taking out an equity release product.
In this guide, we explain how both of these options work and what the main pros and cons of each one would be, to help people to decide which option is the best one for their circumstances and priorities.
- Why might you consider remortgaging or equity release?
- What is your home's equity?
- Example 1: House value increase and loan repayment
- Example 2: Increase in property value
- Example 3: Repayment of loan
- Negative equity
- What are your options if you want to access some of your home's equity?
- Downsizing your home
- Pros of remortgaging
- Cons of remortgaging
- Equity release plans
- Lifetime mortgages
- Home reversion plans
- Pros of equity release
- Cons of equity release
- Which is best for you?
- Get expert advice
Why might you consider remortgaging or equity release?
Property owners who have either paid off all of the mortgage, or a considerable amount of it will usually have built up equity. This means that they have money that they could potentially access to use for whatever they might need it for.
The equity in the property could be used to pay for home improvements, cover living expenses after retirement or to buy a holiday home, caravan etc. Some people may want to access their equity so that they can provide financial support to their family, rather than waiting until they leave inheritance (which could be subject to inheritance tax).
Other people deciding between these options might be looking for a way to pay off an existing loan, or to consolidate debts. There is a long list of different reasons and circumstances where someone might consider remortgaging or equity release.
What is your home’s equity?
Equity can be calculated by using the market value of your property and subtracting any mortgage loan debt that is still left to pay off. Equity builds up as you pay off your mortgage loan, or if your property value increases and sometimes it is a combination of both of these factors.
Example 1: House value increase and loan repayment
If you bought a house 10 years ago for £150,000, your property value could have increased by £25,000 and is now valued at £175,000. This would mean that you have built up £25,000 in equity over that time period. During this time, you have also paid off £50,000 of your mortgage loan, so in total you now have £75,000 of equity in your property.
Example 2: Increase in property value
If the housing market has been strong since you bought a property, you could quickly build up equity. For example, between March 2020 and March 2021, the annual rate of growth was 5.7%, so if you bought your property in March 2020 for £200,000 and your house followed the average increase of 5.7%, your property would have been worth £211,400 in March 2021. In just twelve months you would have built up equity of £11,400 through the value increase alone.
It is common for house values to increase over time, unless there is crash in the property market or another factor affecting the value of the property.
Example 3: Repayment of loan
In some cases, your property value may not have changed much since you bought it. However, let’s say you bought it for £100,000 and have been paying off the mortgage repayments for 15 years. In this time, you have been repaying the initial mortgage loan and the outstanding amount is now down to £40,000, so you have £60,000 in equity.
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Equity through house value increases is not guaranteed though and buying property just before a dip, or even worse, a crash, could leave you with negative equity. Before mortgage lenders will approve a loan, they will request a valuation of the property to try and ensure a negative equity scenario is not a likely outcome.
What are your options if you want to access some of your home’s equity?
There are three main options available to you if you want to access some or all of your home’s equity and which one you choose will depend on your specific situation. The three main options are:
Downsizing your home
If you live in a property with several bedrooms but you only require one, you might want to choose to downsize by selling your property and buying a smaller, cheaper one. This is a common choice for people where their children have grown up and moved out of the family home, and/or if a partner dies and they are now living in the property alone.
As an example, you sell your 3-bed house for £300,000 and buy a one-bed apartment for £150,000, which would give you £150,000 cash to use however you wish to.
As well as being able to access the equity in the property, downsizing can mean that the homeowner can reduce bills and have less cleaning and maintenance to do. As people get older, it becomes harder to keep on top of jobs like cleaning and gardening, so downsizing to an apartment could be a better option for multiple reasons.
This option is attractive if you are happy to sell your property and move out but if you do not want to move out then you can choose between the following two options instead.
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Remortgaging involves taking out another mortgage on your property. You can do this once you have already paid off your original mortgage, or you can remortgage while you still have an existing mortgage.
If your property has equity, then the mortgage lender will often be willing to pay you a lump sum as part of a remortgage deal. For example, your property is worth £200,000 and you have an outstanding mortgage loan of £100,000. You could find a remortgage deal that would be willing to let you access the £100,000 equity in your property, or at least most of it.
So, you could agree a remortgage deal where the lender gives you £50,000 as a lump sum payment and your outstanding loan would go up to £150,000. You would also need to consider additional costs such as remortgage arrangement fees and the extra amount of interest you would be paying for the remainder of the mortgage.
People consider remortgaging their property for a number of different reasons, including to pay for home improvements such as an extension on a new bathroom, for example.
Lenders will review an application for a remortgage by looking at:
- How much equity is in the property compared to how much you want to borrow.
- What your income is.
- How much monthly outgoings you have.
- How old you are.
- Your credit history.
- What you are using the money for.
The more equity that you have in the property, the better chance you will have of being approved for a remortgage. Also, when they look at how you will be spending the money, if you are using it for something that will increase the value of your property, the loan is more likely to be approved.
For example, if you are putting a new kitchen into your property with the money, the improvements should increase the value of your home. If you were simply paying for a luxury holiday or a car, this would not affect your property value, so this loan is less likely to be approved compared to using it for home improvements.
Pros of remortgaging
- You can access value that is in your property.
- You can continue living in the property and owning it yourself.
- It can be quick to arrange with minimal impact on beneficiaries.
- You may be able to get a better interest rate than your existing mortgage loan.
Cons of remortgaging
- Usually not available if you have retired.
- You will have to pay a monthly repayment on the mortgage loan.
- Stricter lending criteria than other options.
Equity release plans
Equity release is a financial product where you can access the equity in your home by taking a loan out against your property. To be eligible for equity release you would have to be at least 55 years old and have a certain amount of equity in your property.
You would usually only be eligible if you have paid off your mortgage on the property or if you use the lump sum to pay the remainder of it.
There are two different types of equity release:
In this scenario, you retain 100% ownership of your property and the lender provides you with a lump sum or regular payments. Unlike a standard mortgage loan, you do not need to pay off a monthly payment, as the loan is repaid when you die or move into full-time care accommodation. However, the interest on the loan continues to accumulate until it is repaid.
With a home reversion plan, in exchange for a lump sum or regular payments, you sell all or part of your property to the lender but you are still able to live in the property until you die or move into full-time care accommodation. When the property is sold, the lender will be due the capital and interest.
Pros of equity release
- You do not have any monthly repayments to make.
- Access some of the value in your property.
- You can continue to live in the property.
Cons of equity release
- You could end up leaving a lot less inheritance to your family.
- It is difficult to calculate how much interest will be finally owed to the lender.
- It can affect your benefits such as pensions.
- If your property value increases, you will not benefit from it if you have completely sold the property.
Which is best for you?
Deciding which of the three options is best for you depends on your specific situation and whether you want to continue living in your home. If you have enough income to pay remortgage payments, then this could be the most suitable option for your circumstances.
If, however, you have a limited amount of income or you want to be free of the financial commitment of monthly repayments, equity release could be the better option. You would need to consider the impact that equity release would have on any beneficiaries of your estate and maybe discuss your plans with them so that they know what will happen in the event of your death.
With equity release, you would be able to arrange to ringfence an amount of money to ensure that your beneficiaries receive that amount when you die, so if the impact on them is your main concern, this could help you to decide.
Some people opt for equity release because they want to reduce the amount of inheritance tax that will be due, so that is another consideration to take into account when making your decision.
You may find that you are not eligible for one of the options, perhaps because you are not old enough to qualify for equity release, or there is not enough equity in your property. Alternatively, you might have adverse credit history that will mean that you will not be able to get a remortgage application approved, or you would only be able to obtain a deal with a high interest rate.
Get expert advice
Before you decide on any of the options available to you, you should discuss your circumstances with an expert, such as the team at Boon Brokers, who can provide impartial advice and fee-free on which option would be best once we have discussed your specific details and your top priorities.
As well as being able to find the best remortgage deals on the market, we can also ensure any equity release plan is agreed with your best interests put first. For example, we can ensure that there is a no negative equity guarantee and we can also make sure that you have the flexibility to move home if your circumstances change and you need to move.
We work with providers who are the most trusted in the market and we find the best options based on your specific circumstances, taking into account your financial situation, your property value and what is best for your family.
Call us today for expert advice to discuss the three options that are available and to talk through how each one would impact you, so that you can make the most suitable choice for you and your family.