Introduction
For many homeowners, their home is their biggest financial asset. Over the years, as property values rise and mortgage balances decrease, homeowners build up equity in their homes. Releasing that equity can provide access to funds for a variety of purposes, from home improvements to supplementing retirement income. This guide explores the different ways to release equity from your home, including lifetime mortgages, home reversion plans, and alternative options.
What is Equity?
Equity is the difference between your home’s market value and any outstanding mortgage or debt secured against it. For example, if your home is worth £300,000 and you owe £100,000 on your mortgage, you have £200,000 in equity. Releasing equity allows you to access some of this value without having to sell your home or move.
There are several reasons homeowners may want to release equity, such as:
- Funding home renovations.
- Paying off existing debts.
- Supplementing retirement income.
- Helping family members with large expenses, such as education or housing.
How to Release Equity from Your Home
There are several methods to release equity from your home, each with its own benefits and risks. The most common options are lifetime mortgages and home reversion plans, but there are alternatives such as remortgaging or downsizing.
- Lifetime Mortgage: A lifetime mortgage allows you to borrow money against the value of your home while continuing to live in it. You retain ownership of your property, and the loan is repaid when you die or move into long-term care. Interest is added to the loan, meaning the amount you owe grows over time, but you won’t need to make any repayments during your lifetime unless you choose to. Lifetime mortgages are the most popular type of equity release in the UK.
- Home Reversion Plan: With a home reversion plan, you sell part or all of your home to a reversion provider in exchange for a lump sum or regular payments. You retain the right to live in your home rent-free for the rest of your life, but when the property is sold, the reversion provider takes their share of the proceeds. Home reversion plans usually offer less than the market value of your home, making them a less popular option than lifetime mortgages.
- Remortgaging: If you still have a mortgage on your home, remortgaging to a new deal with a higher loan-to-value ratio can allow you to release some of the equity. This can be a good option if you have
Remortgaging
remortgaged before or if your current mortgage deal has ended. By switching to a new deal that allows you to borrow more against the value of your home, you can free up cash for immediate use. However, it’s important to be aware that remortgaging will increase your monthly mortgage payments and extend the time it will take to pay off your mortgage. This option is typically better suited for those who still have a steady income and can comfortably afford the new repayments.
Downsizing
Another option to release equity is downsizing, which involves selling your current home and purchasing a smaller, less expensive property. This can free up a substantial amount of money, depending on the difference in value between the two homes. Downsizing can be a good option for homeowners who no longer need a large property and are looking to reduce ongoing costs such as maintenance and utilities. However, downsizing requires moving, which may not be desirable for everyone, particularly those who have lived in their home for many years or have family ties to the area.
Equity Release vs. Downsizing
When deciding whether to release equity or downsize, it’s important to weigh the pros and cons of each option. Equity release allows you to stay in your home while accessing the funds you need, but it reduces the value of your estate and may affect your ability to pass on an inheritance. Downsizing, on the other hand, frees up a larger amount of money but requires you to move, which can be a significant disruption.
For some, the emotional attachment to their home outweighs the benefits of moving, making equity release the better option. For others, the financial advantages of downsizing and the opportunity to start fresh in a new location make it the more attractive choice.
How Much Equity Can You Release?
The amount of equity you can release depends on several factors, including the value of your home, your age, and the type of equity release plan you choose. With a lifetime mortgage, for example, you can typically release between 20% and 60% of your property’s value. The older you are, the more you can borrow, as lenders assume they will be repaid sooner.
Home reversion plans usually allow you to access between 30% and 60% of your home’s market value, depending on your age and health. However, because you are selling a portion of your home, you will not receive the full market value for that portion. For example, if your home is worth £300,000 and you sell 50% to a reversion provider, you may receive only £90,000 to £120,000, depending on the provider’s terms.
The Costs of Releasing Equity
Releasing equity comes with several costs that you need to be aware of. With a lifetime mortgage, the main cost is the interest that accrues on the loan. Most lifetime mortgages have a fixed interest rate, which means the amount you owe will grow over time. Some providers also offer “drawdown” options, where you only pay interest on the amount you’ve withdrawn, helping to reduce the overall cost.
With a home reversion plan, there are fewer ongoing costs, but you will receive less than the full market value for the portion of your home that you sell. There may also be additional costs, such as valuation fees, legal fees, and administration fees, which can add up.
Alternatives to Equity Release
Before deciding to release equity from your home, it’s important to consider alternative options. Some alternatives to equity release include:
- Taking out a personal loan: If you need a smaller amount of money, a personal loan might be a better option. Personal loans typically have lower interest rates than lifetime mortgages, and you won’t need to use your home as collateral.
- Using savings or investments: If you have savings or other investments, it may be worth using these funds rather than releasing equity from your home.
- Family support: Some homeowners turn to family members for financial support instead of releasing equity. This can help preserve the value of your home for inheritance purposes.
The Benefits and Risks of Equity Release
Equity release offers several benefits, including access to tax-free cash without having to move out of your home. This can be particularly valuable for retirees who want to supplement their pension or cover unexpected expenses such as medical bills. Additionally, with a lifetime mortgage, you don’t need to make any monthly repayments, which can be a relief for those on a fixed income.
However, equity release also comes with risks. The main risk is that the amount you owe can grow rapidly over time due to compound interest. This can significantly reduce the value of your estate and the inheritance you leave behind. Some plans offer “no negative equity guarantees,” which means that the total amount owed will never exceed the value of your home, but this is not always the case.
Another risk is that releasing equity may affect your eligibility for means-tested benefits, such as pension credit or council tax reduction. It’s important to carefully consider the long-term financial implications of releasing equity and to speak with a financial advisor before making a decision.
Conclusion
Releasing equity from your home can be a valuable way to access the funds you need without having to sell your property or move. However, it’s important to carefully consider the costs and risks involved and to explore alternative options before making a decision. Whether you choose a lifetime mortgage, a home reversion plan, or another method, releasing equity is a significant financial decision that should be made with the help of professional advice
