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How to Release Equity? Detailed Guide, FAQs & Tips

How to release equity

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

If you want to know how to release equity as a senior homeowner or by remortgaging, we have detailed explanations right here. This guide will explain the key difference between equity release schemes and remortgaging to release equity, so you know which one is applicable to your situation. 

Always think carefully before borrowing against the value of your home and seek independent financial advice before signing any dotted lines.  

What is equity release?

Equity release is an option for homeowners from the age of 55, although some equity release products may require you to be up to 65 years old. Releasing equity is a way of accessing lump sum cash or a drawdown facility for a more comfortable requirement. 

The homeowner(s) will release equity from their home and do not need to repay the loan – or interest – until the property is sold, which is mandatory after moving into long-term care, or after death when it will be sold and the loan repaid from the (surviving) homeowner’s estate. 

There are different equity release schemes in the UK that work in different ways. These are lifetime mortgages, enhanced lifetime mortgages and home reversion plans. Only consider an equity release product from a company that is authorised and regulated by the Financial Conduct Authority, and for additional assurances, preferably one that is a member of the Equity Release Council. 

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Who qualifies for equity release?

To qualify for equity release, the youngest of the homeowners must meet the minimum age requirement set by each lender, which as mentioned is usually between 55 and 65 years old. The home that you want to release equity from must be your main residential home and typically the value of your home must be at least £75,000. 

Most equity release providers will require there to be no existing mortgage on the property, but some may allow a small mortgage as long as you intend to pay it off with some of the equity from your home. 

Equity release Vs remortgaging to release equity

It’s important to distinguish between an equity release product and remortgaging to release equity. These are not the same. 

Anyone with an existing mortgage who has built up some equity in their home may be able to remortgage to release equity. There are no minimum age requirements to do this, but rather, it depends on your existing mortgage and personal finances. 

So, how does remortgaging to release equity work?

How to remortgage to release equity from your property

Remortgaging is a process where a homeowner swaps their current mortgage for a different mortgage deal, either with the same provider or another one. Keep in mind that switching to other mortgage lenders, and even switching deals with the same one, can trigger early repayment charges on the outstanding mortgage. 

When you remortgage to release equity, you ask to borrow more money and secure it with the equity in your home. For example, let’s imagine you bought a £200,000 home and took out a £150,000 mortgage to pay for it. Over many years, you kept up with monthly payments on the mortgage and reduced your mortgage to £100,000. Over the same period, the value of your property increases by £20,000, leaving you with a £220,000 home and a £100,000 mortgage debt. 

This means you have £120,000 in home equity. You could access some of this money as a loan by remortgaging to release equity. When you switch mortgage deals, instead of just asking for the same amount as you owe (£100,000). You might decide to ask for a £130,000 mortgage and use the additional £30,000 for home improvements or something else. 

How much equity you can access by remortgaging will depend on personal finances, credit scores and the lender’s loan to value ratio. 

But, back to equity release for seniors…

How to release equity from your home?

If you are a senior homeowner wanting to use an equity release plan in the UK, you have three options. You can release equity with a lifetime mortgage, enhanced lifetime mortgage or a home reversion plan. We explain each of these and how they work below.

How to release equity with a lifetime mortgage

A lifetime mortgage, also known as a reverse mortgage, is when a senior homeowner accesses some of their home equity as a lump sum or drawdown. This amount is charged with a fixed interest rate. Neither the capital loan amount nor the interest needs to be repaid until the property is sold, unless the homeowner volunteers to do so. The reason they may volunteer interest payments is that the interest rolls up and adds to the total debt. 

For example, taking out a lump sum of £65,000 home equity with a decent fixed interest rate of 6.4% would create a debt more than double the original amount in just 12 years. If you use a lender that is a member of the Equity Release Council, you will never have to pay any debt above the eventual sale proceeds of your home. Thus, long-term lifetime mortgages can be expensive but you can be protected with a no negative equity guarantee. 

An enhanced lifetime mortgage is identical to the above with one main difference. During the application process, the applicant fills out a health and lifestyle questionnaire and has the option of supplying the lender with medical records. If they are deemed to have a lesser life expectancy than average, this might allow them to access more equity than normal. 

It is less risky for the lender to let you release more equity if you don’t have as long to live because house prices are less likely to significantly change (go down). This is a good option for people with terminal illnesses especially. It could help pay for private care and treatments. 

How to release equity with a home reversion scheme

Borrowing money with a home reversion plan works differently and is less common than a lifetime mortgage. These plans provide the homeowner with a percentage of their home equity and do not charge interest on this amount. Again, no monthly repayments are required and the loan is repaid through the sale of the property if you move into long-term care or from your estate. 

The company will instead ask for a greater percentage of your home’s future sale, so in essence, you are trading in some of your equity now for around double the amount of equity in the future. Considering the market value of your property could increase, you may be paying even more for a lump sum amount in the long term. 

What can you use equity release for?

Seniors usually use equity release to:

  1. Make retirement more enjoyable
  2. Pay for everyday expenses over a long period
  3. Pay for specialist and private care (at home)
  4. Renovate their home so it is more suited to elderly life
  5. Pay for exciting cruises and trips abroad

Some senior homeowners could decide to release equity and then give the money to family members, possibly to help them buy their own home without having to wait for an inheritance or to help start a new business. There may be inheritance tax implications in doing so. 

What is the catch with equity release?

Some people will argue that the catch with equity release is that even though you don’t have to make monthly repayments – and it can feel like free money at first – the overall costs of using these schemes can be eye-watering. They’re expensive over long periods and can massively affect how much inheritance you leave behind. No doubt this will factor into any decision to use equity release or not. 

But once you understand how they work and what you’re agreeing to, there isn’t really a ‘catch’ to look out for. A financial adviser will ensure you avoid the pitfalls within the process. 

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

It can be a good idea to release equity from your home. The ways of doing so will depend on personal circumstances, such as your age. To ensure it is the right decision for you and you wouldn’t benefit from an alternative credit option – such as a personal loan – you should get advice from a financial services provider first. 

How to release equity with bad credit history

Bad credit history will not affect your ability to release equity as a senior with a lifetime mortgage or home reversion plan. But it could affect your ability to remortgage to release equity, or to access a home equity loan (second charge).

In these situations, you should aim to tidy up your credit file before applying and possibly seek out a mortgage company that specialises in helping people with poor credit.  

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MoneyNerd has other equity release guides!

Releasing equity is a complicated topic and we’ve only just scratched the surface above. If you want to consider a lifetime mortgage further or might want to remortgage to release equity in the near future, search our other relevant guides. We have more information on these topics here at MoneyNerd. 

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