Ways to Release Money from Your Home: Options, Costs and Risks

Are you looking to find out how to release money from your house in the UK? You've come to the right place.

In this article, we will explain:

• What home equity is and how it’s at risk.
• Various ways to release equity from your house.
• The purpose of equity release and how to get a realistic quote.
• The pros and cons of equity release.
• The steps to release equity from your house.

We know that the process of releasing equity can be puzzling, but rest assured that we’re here to help you understand things better. With our clear and straightforward advice, you’ll grasp the concept of equity release in no time.

Let’s dive in and discuss the best way for you to release equity from your house.

What is home equity?

Home equity is a term that refers to the value of your home you own outright with no outstanding debts. So, as you pay off the mortgage you took out to buy your property, your home equity will increase as long as the value of your home doesn’t decrease. 

For example, if you bought a £200,000 property with a £50,000 deposit and £150,000 mortgage, your initial home equity is £50,000. If you pay off another £50,000 through years of mortgage repayments and the value of your home increases by £10,000 over the same period, you’ll have a £210,000 home with a £100,000 outstanding mortgage. Thus, you’ll have £110,000 home equity. 

What is the purpose of equity release?

People release money for many purposes, but lender and product restrictions can apply. Tell the adviser how you intend to use the funds.

One of the most common reasons to release equity is to complete home improvements and renovations. Not only can this improve your standard of living, but updating the home can increase the value of your property, which increases some of your home equity once again. 

Other common reasons for releasing equity are:

1. Debt consolidation 
2. Buying second (holiday) homes
3. Pay for education or private healthcare
4. To buy a car
5. To start a new business

Can you release equity from your home?

Depending on your age and finances, options can include remortgaging, a further advance, a second-charge mortgage or later-life equity release. Borrowing must be repaid under its terms; a home-reversion plan instead sells a share of the property.

We’ll discuss some of the best ways to release equity from your house below. 

How do I release equity from my house?

There are three main ways to access your home equity in the UK:

1. Equity release schemes
2. Second charge mortgages (home equity loans etc.)
3. Remortgaging to release equity

Is it a good idea to release equity from your house?

Releasing equity from your home can be an effective way of accessing a larger amount of credit than an unsecured personal loan. If you need a decent interest rate on a larger amount, equity release can be a good idea. However, whether or not it is a good idea for you will be decided on a number of personal factors. You may want to get independent financial advice first. 

If you do decide to release equity through a loan, mortgage or equity release scheme, you should only consider products from a lender that is authorised and regulated by the Financial Conduct Authority. 

What are the pitfalls of equity release?

The biggest pitfall of releasing equity is not fully understanding the features and risks of the method you choose. For example, not repaying some products as agreed can result in your home being repossessed and sold to clear the debt. 

Another potential pitfall is unnecessarily overborrowing against your equity. Borrowing more against your home can be costly over time and it will then take longer to pay off the debt and own your property outright. 

We discuss the ways to release equity in detail below to help you with decision-making. 

#1: Equity release schemes

A lifetime mortgage is a loan secured on your home; you retain ownership. Interest that is not paid is added to the balance. The loan is usually settled when the last borrower dies or moves permanently into care, subject to the contract. Required or optional repayments vary by product. A home reversion plan is a sale of part or all of your home, usually below open-market value, in return for money and the right to remain under the plan’s occupancy terms. It is not a loan. The provider receives its agreed share when the home is sold.

Most standard lifetime mortgages start at age 55, but some payment-term lifetime mortgages are available from 50 and require interest payments for an agreed period. Home-reversion minimum ages and all other eligibility rules depend on the provider. Check the youngest applicant’s age and the actual product criteria. Eligibility depends on the product, age, property, credit circumstances and any required affordability assessment. Minimum property values and borrowing limits are lender-specific. An existing mortgage normally has to be cleared at completion, often using some of the released funds.

What are the different types of equity release?

There are two main types of equity release for seniors, namely a lifetime mortgage or home reversion scheme. There’s also an enhanced lifetime mortgage which is the same as a lifetime mortgage but preferable to people with lesser life expectancy due to medical issues. 

It’s better to choose a lender that is a member of the Equity Release Council, as this offers homeowners more guarantees and protection. 

Lifetime mortgage

A lifetime mortgage is a loan secured on your home; you retain ownership. Interest that is not paid is added to the balance. The loan is usually settled when the last borrower dies or moves permanently into care, subject to the contract. Required or optional repayments vary by product.

Some people decide to make voluntary interest payments to reduce the debt owed. Having a lifetime mortgage for around one decade on a standard rate can double the amount owed. 

Your right to stay depends on meeting the plan’s occupancy and other contractual conditions. Unpaid interest can eventually exceed the property’s value; the time and amount depend on the rate, borrowing, repayments and property prices.

For a plan meeting the relevant Equity Release Council standards, the right to remain depends on keeping the property as your main residence and meeting the contract terms. A no-negative-equity guarantee limits repayment to the net sale proceeds when its conditions are met; it does not stop the balance growing or make the product risk-free.

Enhanced lifetime mortgage

These mortgages work the same as described above but allow people with a shorter life expectancy to access more of their equity than usual, which can help pay for private care and health services. The application process includes a medical questionnaire and applicants have the option of supplying medical records to support any claims. 

Home reversion schemes

A home reversion plan is a sale of part or all of your home, usually below open-market value, in return for money and the right to remain under the plan’s occupancy terms. It is not a loan. The provider receives its agreed share when the home is sold. See related guidance.

Illustration only: receiving £40,000 in exchange for a 60% ownership share in a £200,000 home is a sale below open-market value, not a loan. If the home later sells for £220,000, that 60% share is £132,000 before relevant costs. These hypothetical terms are not a current offer.

#2: Second charge mortgages (home equity loans and HELOCs)

A second charge mortgage is an overarching term to describe different loans and products that allow you to borrow some of your home equity. These products are separate from your first charge mortgage used to buy your home, hence the name second charge. Think of them like an additional loan attached to your home. 

A second-charge mortgage normally has its own payment schedule alongside the first mortgage. Rates, terms and any drawdown facility depend on the product.

A secured loan may have a fixed or variable rate. US-style HELOC descriptions should not be assumed to apply to UK lending: verify availability, interest, fees and payments both during and after any drawdown period.

If you cannot keep up with repayments, the lender has the right to repossess and sell your home. The sale proceeds would first be used to clear the first mortgage debt before being used to clear the home equity loan or HELOC debt. 

#3: Remortgaging to release equity

Remortgaging to release equity is not the same as a second charge mortgage because you don’t add a second debt to your home, but rather, extend your current mortgage by switching it. 

Remortgaging is when you switch your current mortgage deal to a different deal. So, when you remortgage to release equity, you switch to a new deal but simultaneously take out a bigger mortgage by borrowing additional funds against your home equity. 

For example, let’s imagine you have a £100,000 mortgage with £100,000 home equity. Instead of getting a new mortgage for £100,000, you choose to get a new £125,000 mortgage. £100,000 is used to pay off your previous mortgage, and the additional £25,000 is borrowed against your available home equity, which may be used for home renovations etc. 

Second charge mortgage vs remortgage to release equity

It’s important to spot the difference between second charge mortgages and remortgaging to release equity. The former involves taking out a new and separate loan against the portion of your property that you already paid off – i.e. your equity – whereas the latter is switching your current mortgage and extending it to access some of your equity. 

Is it better to remortgage to release equity?

Neither option is automatically cheaper. Compare a remortgage, further advance and second-charge loan using the actual interest, fees, early-repayment charges, term and total cost.

A second charge may preserve an attractive first-mortgage rate, while remortgaging may offer a better overall deal. A regulated adviser can compare them on the same borrowing amount and repayment assumptions.

What is the best way to release equity from your home?

The best way to release equity from your house will be determined by age and personal circumstances. 

Compare downsizing, savings or other assets, benefits and grants, a standard mortgage or retirement interest-only mortgage where affordable, and other suitable borrowing. A specialist adviser should assess the alternatives; equity release is not the only option in later life.

For younger homeowners, only a detailed assessment of the deals available to you is the way to know which method is better. Special attention should be paid to all the fees and costs involved.