Freeing up Equity in Your Home – Step-by-Step Guide

Looking to free up equity in your house? We’re here to guide you. In this article, we’ll help you understand:

•  What home equity is and how it works
•  The real price of a bad home equity loan
•  What equity release means and its uses
•  How to free up home equity
•  Some possible problems with equity release

We know that this topic can feel difficult and a bit scary – you might worry about making mistakes or losing money. But we’re here to help. Every month, over 6,900 people visit our website for advice on secured loans.

We have the know-how to help you make good decisions about your home equity.

Why do homeowners release equity?

Homeowners choose to use equity release methods for an array of reasons. Some of the most common are:

1. Home improvements – completing home improvements can increase the property value and your home equity. 
2. Debt consolidation – debt consolidation is a process of merging your debts together under a lower interest rate. Accessing equity will enable you to do this. 
3. Buy another home – the equity can be used to help you put down a deposit for a second home or even help you move home when downsizing.
4. Help family – releasing equity is common among older people who want to financially help out younger family members, especially those trying to buy their first property. 

How do I release the equity in my home?

Some of the most common methods of property equity release are home equity loans, HELOCs, remortgaging or using a lifetime mortgage. 

We have discussed these options below. If you decide to use one of these methods to release any amount of equity, you should only use a lender that is authorised and regulated by the Financial Conduct Authority. You should also consider the risks and seek professional advice first. 

#1: What are home equity loans and HELOCs?

A home equity loan or home equity line of credit (HELOC) are types of loans that allow you to access credit based on the amount of home equity you have built up. Lenders will allow you to borrow up to a maximum of 80-85% of your accumulated home equity to create a responsible lending loan to value ratio (LTV). For example, with £100,000 equity you could borrow up to £85,000 maximum. 

Home equity loans and HELOCs do not work the same way. A home equity loan gives the homeowner a lump sum with a fixed interest rate and monthly repayments begin straight away. Whereas a HELOC gives the homeowner a line of credit that is accessed like a credit card over a draw period. It’s usually after the draw period that monthly repayments begin with a variable interest rate. 

How do you qualify for a home equity loan?

To qualify for a home equity loan or HELOC you must meet the lender’s initial criteria, which usually means being older than 18 with a certain level of income and a UK property that you plan to live in for at least six months of every tax year. Of course, you’ll also need to have built up enough home equity to be released. There may be a minimum amount you need to release, such as £10,000. 

Upon application, the lender will assess your personal finances and income to ensure you can repay the debt in full. They’ll also complete a close search of your credit score and you may be rejected if you have unpaid debts and defaults. 

#2: Remortgaging

You can release equity from your home by remortgaging. Understanding how to remortgage to release equity is fairly simple. When you apply for a new mortgage, you will apply for the same amount of money needed to repay your existing mortgage (consider early repayment fees too!) and then ask for an additional amount based on how much equity you wish to release. 

For example, if you have a £100,000 existing mortgage and £100,000 in home equity, you could look for a new mortgage asking to borrow £130,000. This money will be used to pay £100,000 to your existing mortgage provider and you’ll have also released £30,000 equity. 

How easy is it to remortgage to release equity?

The process of remortgaging to release equity is fairly simple. There are scores of lenders around that are willing to provide a new mortgage and simultaneously assist you in unlocking equity, but your applications will be subject to personal finances and your credit score. Lenders will need to know about all aspects of your finances to make a decision. 

Remortgaging to release equity is more about getting it right and utilising a deal that doesn’t drastically increase your loan to value ratio and the interest payable. You’ll also need to factor in early repayment fees on your current mortgage. 

Should I remortgage to pay off debts?

Some people choose to remortgage to pay off debts. In other words, they consolidate existing debts into their new mortgage. This can be beneficial if the new mortgage has a lower interest compared to the interest rates being paid on the debts, such as personal loans and credit cards. 

However, this should be approached on a case-by-case basis considering other fees and charges. There may be more advantageous ways to consolidate debts, such as an unsecured debt consolidation loan or a balance transfer credit card. 

Home equity loans for all purposes

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#3: What is a lifetime mortgage?

A lifetime mortgage is a unique type of mortgage that allows you to access a significant amount of home equity and not have to make repayments in the immediate future. You’ll get access to the money tied up in your home and be able to use the money as you wish. The money will then be paid back to the lender from your estate when you die, which may include the sale of the property. You may have to pay back early if you sell the property and go to live at an aged care facility. 

You should think carefully before using a lifetime mortgage, or the similar reverse mortgage, because it may prevent you from leaving your property to beneficiaries of your will. However, beneficiaries may be able to pay off the lender (including interest) and keep the home. It also involves fees to set up, which Money Helper estimates will cost up to £3,000. 

If you do not plan to leave your property to family, this could be a beneficial way to access credit for your retirement or for other means. 

What are the pitfalls of equity release?

The biggest pitfall of releasing equity from an asset is releasing too much equity or more than what you need. 

Keeping this credit unused in a modern low-rate savings account or spending it unnecessarily will only put you in a worse financial position. Even with a low-interest rate on a new mortgage, loan, HELOC or lifetime mortgage, you’re highly likely to be paying more than what you could save with the funds in the best UK savings account. Moreover, lenders will generally charge you higher interest if you start tapping into a lot of equity. 

For these reasons and others, it is recommended that you only release equity that you genuinely need and nothing more. Of course, it can be difficult to accurately predict how much money you will need if you are completing large home renovations, but there is a solution for this.

A lifetime mortgage can be agreed with a reserve, which is an extra pot of money you can access from your equity if required – but not counted within the initial lifetime mortgage agreement. 

What is negative equity?

Negative equity is when the value of your house decreases below the total value of your home equity and the remaining mortgage balance. For example, if you have £100,000 in home equity and £100,000 mortgage, but your house is now only worth £190,00 instead of its previous value of £200,000, you now have negative equity of £10,000. 

This occurs due to a property decreasing in value for many reasons, some of which are outside the homeowner’s control. Lifetime mortgages and the other methods of releasing equity try to somewhat avoid this by only allowing you to release up to a maximum of 85%.