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How to Release Equity from Your Mortgage? Detailed Guide

equity release mortgage

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

How can you release equity from your mortgage? We discuss the different ways to access some of your home equity in the UK. We’ll look at the three most common methods of releasing equity, namely remortgaging, second charge mortgages and an equity release mortgage for over 55s. 

What is home equity?

Home equity is the value of your home that you own outright with no debt attached. You can probably work out how much home equity you have by subtracting your outstanding mortgage debt away from the current value of your home. For example, if you have a £250,000 property with a £75,000 mortgage debt, your home equity will be £175,000 (250,000 – 75,000). 

Therefore, paying off more of your mortgage can increase your home equity. Or your equity can increase if the property increases in value. 

Those with other debts attached to their home will also need to subtract these debt amounts away from the current property value to calculate their home equity. 

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What is releasing equity?

Releasing equity refers to when homeowners borrow against some of their home equity. You can find different types of loans and equity release plans that allow the homeowner to access a lump sum or drawdown loan that is secured by their home equity. 

Why do people release equity?

Releasing equity can be an advantageous way to borrow large amounts of money that are not available through unsecured personal loans or credit cards. These larger amounts could then be used for a host of reasons, not limited to:

  1. Home improvements and renovations – using the loan to pay for a new kitchen, loft conversion or extension could increase the value of the property and therefore increase your home equity again. 
  2. Debt consolidation – one large loan with a competitive interest rate could be used to pay off multiple existing debts that are costing you more in interest. 
  3. To buy other property – the equity in one property may be used to help buy another, or pay off another mortgage. 

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What is the downside to releasing equity?

Releasing equity can be a beneficial method of borrowing large amounts of money, but there are some drawbacks to releasing equity from your home. 

The main drawback is that you are adding another debt to your property, which will usually mean it will take longer for you to own the property outright, i.e. pay off all the attached debts. Moreover, releasing equity is not free and you still have to pay interest on the amount you borrow, often including hefty early repayment charges.

How can I release equity from my mortgage?

Although you may have paid off some of your mortgage and increased the amount of home equity you have, you don’t actually release equity from your mortgage. Equity can only be released from assets.

The mortgage is the loan that is being used to help you buy a property (the asset). As you pay off your residential mortgage, the debt attached to the asset is reduced and your amount of home equity increases. Therefore, it is technically not possible to release equity from the mortgage attached to the property – but there are still ways to release equity from the property. 

How can I release equity from my home?

The two most common methods of releasing equity from your home are by remortgaging or using a second charge mortgage. There is a third method called equity release (consisting of a lifetime mortgage or home reversion plan), which is only available to homeowners over the age of 55. 

In the following sections, we explain remortgaging to release equity, using second charge mortgages to release equity, and equity release via lifetime mortgages. 

#1: Remortgaging to release equity

Remortgaging your property to release equity is one of the most common methods used by homeowners of all ages. This is the process of taking out a new mortgage on your property which repays your old mortgage but simultaneously allows you to borrow more. This additional borrowing is secured by your available equity, and you could borrow up to 80% of it depending on personal finances and the lender’s loan to value (LTV) ratio. 

For example, you may own a property worth £200,000 with a £100,000 outstanding mortgage – giving you £100,000 home equity. You decide to swap your existing mortgage for another one but need an additional £20,000 for a new kitchen. Therefore, you ask for a new mortgage worth £120,000 with £100,000 being used to pay off the first mortgage and £20,000 being used to pay for the new kitchen.

Note that the above is a simplified example. There may be early repayment charges to pay because you have paid off your mortgage early, and additional mortgage broker/advice fees. 

What happens to your mortgage when you release equity?

When you remortgage to release equity, your new mortgage will be bigger than your old one, and could possibly have a different interest rate due to the increased borrowing or changes to your financial situation since taking out the prior mortgage. 

As your new mortgage will be bigger than it was previous to remortgaging, the monthly repayments on your new mortgage are likely to be bigger. 

#2: Second charge mortgages

A second charge mortgage is a secured loan applied to a property with an existing mortgage debt still active. This second loan is secured by some of your home equity. For example, if you have a property worth £150,000 and an outstanding residential mortgage of £50,000, you can get a second loan secured by some of your £100,000 home equity. 

This second loan could be a generic secured loan, or it could be a second charge mortgage, which refers to either a home equity loan or home equity line of credit (HELOC). 

The different types of second charge mortgages

The two types of second charge mortgages are secured by home equity and require monthly repayments on the debt and interest, but they do not work in exactly the same way. One offers a lump sum loan whereas the other uses a drawdown facility. 

Home equity loans

Home equity loans are simple to understand. They provide the homeowner with a loan up to 80% of their home equity and the loan is charged with a fixed interest rate. The loan is paid back each month over a fixed period until all the loan and interest has been repaid.

If the homeowner fails to repay, the lender can repossess the property and sell it to recover the debt, but the second charge lender must first give the first charge lender priority to recover its own debt on the property. 

Home equity lines of credit (HELOC)

HELOCs work as described above with some key differences. The loan is paid out through a drawdown period where the homeowner can access some of the loan in stages. This period is called the draw period and may last as long as two years. During the draw period, the homeowner must make (variable) interest repayments. And once it ends, the loan and interest will need to be repaid each month. 

#3: Equity release mortgage

The third option is equity release, also known as an equity release mortgage. This option is only available to homeowners who are over the age of 55, usually with no outstanding mortgage or a very small one they agree to repay as part of the process. If one homeowner is over 55 and the other is younger than 55, then they will not yet qualify. The homeowner must be releasing equity from their main residence, and it should be worth at least £75,000. 

Equity release is very different to any other type of loan because it does not require the borrower to make any monthly repayments. The lump-sum received by the homeowner will only be paid back if the homeowner moves out of their home and into long-term care, or if they die. In either situation, the homeowner repays the debt from the money raised from the sale of their home. And in each case, this detracts from the potential wealth passed on to family and friends in the homeowner’s estate. 

The purpose of equity release is to give older homeowners access to money that can be used to improve the quality of later life throughout retirement. It could be used for home renovations, holidays, cars, private healthcare or as a financial gift to loved ones. 

What is the catch with equity release?

The overriding catch with equity release is that both a lifetime mortgage and home reversion plan can be exceptionally costly. Lifetime mortgages and home reversion plans can result in the homeowner having to pay back more than double the loan amount they borrowed. We explain how both of these equity release products work below. 

The different types of equity release

As discussed, there are two types of equity release for seniors to choose between. A lifetime mortgage is a more popular choice, which has resulted in more lenders offering lifetime mortgages than home reversion plans. 

Lifetime mortgage

When you take out a lifetime mortgage you receive either a lump sum or drawdown loan with a fixed interest rate. The interest is applied to the loan amount each month but is not required to be repaid. The interest keeps growing, making the total debt owed bigger as time moves on. The amount you owe when you move into care or pass away is the amount that will be recovered from the sale money of your property. 

For example, you could release £65,000 equity with a lifetime mortgage and then pass away 12 years later. If the interest charged on your loan was 6.4% and kept rolling up each month, a total of just under £137,000 would need to be repaid from your property sale proceeds, significantly eating into any inheritance you planned to pass on. 

Home reversion plan

A home reversion equity release plan asks the homeowner to agree to give the lender a set percentage of the future sale money. In return, the company will provide the homeowner with a lump sum or drawdown loan of a lesser value. 

For example, you might get a 25% loan on a £200,000 home, which is £50,000. But when you move into care or die, the property will be sold and you must give the lender 60% of the proceeds. This means you could pay around £120,000 for your £50,000 loan, subject to how the property valuation changes over time. 

The Equity Release Council and negative equity guarantee

The Equity Release Council is a group set up to maintain the standards of the equity release sector and to protect homeowners. Lenders can volunteer to join the group which makes them more appealing to homeowners considering a lifetime mortgage. But at the same time, the lender is only more appealing because they conform with a number of rules designed to protect the homeowners. 

One of the most referenced rules made by the Equity Release Council is the negative equity guarantee. This is a promise that the lender will not chase any debts that have exceeded the property value. For example, if your lifetime mortgage debt grew so big that the property sale proceeds could not pay it off, the shortfall never has to be repaid. 

Is equity release right for you?

The only way to know if equity release is right for you is to do lots of research on these products and to speak with a financial adviser who specialises in equity release. 

We can help with your research here at MoneyNerd. Check out our other equity release guides and lifetime mortgage discussions now – all 100% free! 

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