Releasing equity from your home is a financial term that lets you gain access to the money that’s currently tied up in your home. With equity release, you can end up with money in your bank account that can be used to pay for a range of different things.
In this blog, we’ll explore the four main options you have when it comes to releasing equity. Have a read through them all to see which one is best suited to your current situation:
Remortgage Your Home
Remortgaging is seen as a very common way of accessing the equity tied up in your property. To explain it simply, a remortgage is when you look for a new mortgage on your existing property. To release equity, you will be looking for a new mortgage that’s bigger than the one you’ve currently got. It’s all based on the way that property values increase over time. Generally speaking, house prices will always slowly increase. So, if you bought your home five years ago, it could already be worth more now. If you sold your home, you’d get more money for it, but then you’d have to go through the stress of buying a new home.
Instead, a remortgage lets you take advantage of the value increase without having to move or sell up. For example, say you currently have a mortgage where you owe £50,000 to the lender. Now, let’s say you get a new mortgage that’s £80,000. Here, you pay off the old mortgage and have £30,000 left over. Of course, there are fees to consider that take some cash off that figure, but the point is that you now have access to some additional money. This could help you pay off any debts, or even be used to fund home improvements that end up boosting the value of your home even more.
Take Out A Second Charge Mortgage
With second charge mortgages, you essentially get a secured loan that uses your home as collateral. It’s an alternative to remortgaging, and many people just refer to it as getting a second mortgage. The idea is that you take out a loan that’s worth up to the amount of equity you have. Equity is basically just how much of the property you technically own. So, if your home is worth £300,000 and you’ve still got £100,000 of your mortgage left to pay, then you’ve got £200,000 in equity. As such, you can borrow up to that amount of money from a lender.
This option gives you access to equity and can often be more affordable than a remortgage. It depends on how much money you need and the situation you’re in. For people with bad credit ratings, it’s often easier to get a second charge mortgage. Plus, it can sometimes be cheaper if you only need to borrow a relatively small amount. The price of the second charge mortgage will be less than the cost of remortgaging as there are additional broker fees to consider. But, the more equity you need access to, the more expensive second charge mortgages become as they have pretty high interest rates if you’re credit score is low.
Take Out A Further Advance From Current Mortgage Lender
Taking our a further advance from your current mortgage lender is basically just increasing your existing mortgage. Why would you want to do this? Well, it goes back to the idea of the value of your home rising since you bought it. It’s worth more, so you want to take advantage of that. When you take out a further advance, you do so at a different rate to your existing mortgage, and the interest rates are often much lower than typical personal loans. But, it’s also a secured loan, so your property is used as security to ensure you keep up with repayments.
This is a good idea if your current mortgage lender offers decent interest rates that make it cheaper than getting a second mortgage or remortgaging and finding a different lender. The amount you can add on to your mortgage is dependent on how much your property is worth, and the equity you’re entitled to.
Lastly, you have the idea of a lifetime mortgage. This is a loan that doesn’t need to be repaid until you pass away or enter long-term care. It can help free up some of the equity that’s currently tied up in your property. You can only take out a lifetime mortgage if the property is your main residence and you own it. You’ll get the loan, which can be used however you want, and all the interest fees and costs are added to the total loan amount. When you die, your property is sold, and the money from the sale will pay off the lifetime mortgage. If there’s any money left over, then it goes to your beneficiaries as outlined in your will. Alternatively, they could pay off the lifetime mortgage if they can afford it, and keep your home.
There are two types of lifetime mortgages; interest roll-up and interest-paying. With the first, you get a lump sum of money – or agree to be paid regularly every month – and interest gets added onto the loan. You won’t have to make any regular repayments until the end of your mortgage term. With the second option, you get a lump sum of cash and can make regular payments yourself. This prevents interest from rolling up and causing the loan to be more expensive. Either option still helps you release equity, so it depends on your situation.
Realistically, it makes a lot of sense to go through each option and calculate which one is the cheapest for you to afford. Either way, you can then use the cash you receive to pay for home improvements, get rid of debts, or anything else that suits you.