How to Release Equity for Home Improvements?

Representative example: If you borrow £34,000 over 15 years at a rate of 8.26% variable, you will pay 180 instalments of £370.70 per month and a total amount payable of £66,726.00. This includes the net loan, interest of £28,531.00, a broker fee of £3,400 and a lender fee of £795. The overall cost for comparison is 10.8% APRC variable. Typical 10.8% APRC variable

Do you wish to make your home better using a loan but feel unsure about the whole process? You’ve come to the correct place. This guide is here to clear all your doubts about home improvement loans in the UK.

Every month, nearly 7,000 people visit our site seeking advice on loans for home improvements. You’re not alone on this journey.

In this guide, we’ll discuss:

What home equity and equity release are
How to compare quotes to get the best deal
Various ways to release equity for home improvements
Things to think about before getting a home improvement loan
Pitfalls of equity release and other ways to fund home improvements

We understand that loans can be puzzling. That’s why we’ve made this guide simple to grasp.

Let’s begin and discover the best way for you to release equity for home improvements!

Can I release equity from my home for home improvements?

If you have home equity, you may be able to use it to access credit and fund home improvements. Different ways and products are used to do this, which are discussed shortly in this guide. Home improvement projects are one of the most common reasons – if not the most common reason – for releasing equity. From my experience, it can be a smart choice because doing so can increase the value of your house.

Other common reasons to release equity are for debt consolidation, to buy another property in the UK or abroad, or pay for expensive cars, private medical bills and holidays.

How do you release equity to renovate?

It would be best if you borrowed against some of your available equity to release equity to renovate. This means taking out credit and securing the credit agreement with your equity. There are multiple credit options when borrowing against your home equity (see below).

Applications for products to release equity will depend on how much equity you have and your credit score. Just because you have home equity does not mean access to credit that is secured against it is an automatic guarantee. Your personal circumstances and finances will be rigorously assessed.

By using home equity as collateral within the agreement, the lender may be able to offer a lower interest rate. If you do not repay the credit as agreed, then the lender can force you to sell your home to repay the debt, known as foreclosure.

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Methods of releasing equity for home improvements

Below I have listed six of the most common ways homeowners release equity for home improvements. If you need help working out which option is best for you, there are money advice groups and commercial services you could consider.

In addition to financial advice, it is essential to seek legal advice if you want to apply for equity release. The cost of an equity release solicitor is usually around £1,000. Budgeting legal costs into the equation is crucial when choosing a method of releasing equity. It may be the case that no single option is more advantageous, but what you choose will depend on what different lenders offer you.

Remortgage for home improvements

It is possible to remortgage to release equity for home improvements.

Remortgaging is when you switch from your existing mortgage to another with more beneficial repayment terms, such as lower remortgage rates on monthly payments. The planned new mortgage is used to pay the amount you owe on the existing mortgage, so you still only have one mortgage at one time. However, you may be subject to early repayment charges because you ended your first mortgage earlier than planned.

When refinancing for home improvements, instead of looking for a new mortgage that pays off your current mortgage, you look for one that does that and more. The new mortgage loan needs to be larger than the amount owed on your existing mortgage, and this extra amount is secured by home equity.

For example, if your current mortgage has a £100,000 balance and you have £70,000 home equity, you might look to remortgage for £130,000 instead. The first £100,000 will be used to pay your existing mortgage, and the other £30,000 will be paid to you as a lump sum loan secured through home equity.

Second charge mortgage

A second charge mortgage is when you release equity by adding a second mortgage to the same property. It is an alternative option to remortgaging for home improvements. It doesn’t mean you’ll need to pay early repayment charges because the first mortgage is not paid back earlier than agreed. You take out a second mortgage on the same property secured by an amount for home equity and then make monthly repayments to both mortgage providers.

Although you avoid early repayment fees, you may be subject to other fees when taking out a second mortgage, including closing costs when this mortgage ends. As you can see, it isn’t a straightforward choice between second charge mortgages and remortgaging.

Lifetime mortgage (Reverse mortgage)

A lifetime mortgage – sometimes called a reverse mortgage – is another method of equity release for home improvements specifically for senior citizens who own their homes outright already. It is a consideration for retirement planning individuals, and a mortgage broker can help you find the best deals on the market.

Lifetime mortgages work by providing up to 100% of the homeowner’s home equity as a lump sum payment. This means they can access hundreds of thousands of pounds in some cases. Unlike remortgaging and second mortgages, this payment is not paid back through regular repayments.

The total cost of the mortgage is repaid upon the death of the homeowner(s) through the sale of the property or their estate. Or it will be repaid early if the property is sold for the homeowner to go into an aged care facility. The homeowner cannot be forced out of the home if they do not need to go into care.

This method can be used to fund a home improvement project. It is also used to improve quality of life during retirement or for financial gifts to family members, as mentioned above by a MoneySavingExpert forum user. Most people discuss this option with family members who would be beneficiaries of the property to ask their opinion or keep them informed of their decision.

Home equity loan

A home equity loan is a type of secured loan similar to a second charge mortgage. Some experts even refer to home equity loans as second mortgages. These loans are secured with home equity but usually have a fixed interest rate.

The homeowner receives the loan as a single payment to be used as they wish, often for a home improvement project. The homeowner will pay back through monthly repayments for a fixed period until all the loan and interest have been repaid. If they fail to repay, the lender can initiate foreclosure, forcing them to sell the property to recover the loan debt.

Home equity line of credit

A home equity line of credit (HELOC) is a variation of a home equity loan that also leverages home equity. It works in the same way with some significant differences.

The money is not paid through one deposit but through multiple payments over a draw period. The homeowner draws money from the loan over time, which can be helpful when trying to stick to a home renovation budget split into different stages.

During the draw period, only the interest is paid back. After the draw period ends, the homeowner must start repaying the principal loan amount, as well as interest, for a fixed time frame until all the debt is repaid.

Secured loan

Sometimes you can get a secured personal loan that uses home equity as collateral, such as a secured home improvement loan. When using home equity as security instead of a vehicle or other asset, these loans are almost identical, if not the same as some home equity loans and second charge mortgages. A financial advisor can help you make the right choice when choosing the best loan for your needs.

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How the value of home improvements can affect home equity

Home equity can be affected by the added value of various home improvements. Some home improvements lead to higher home equity than others. According to Uswitch, the most profitable home improvements include extensions, loft conversions, and kitchen renovations. However, the value of your property could reduce if home improvements have gone wrong. In turn, this could mean that your home equity could also decrease.

Before you get any work done, perform a property valuation so that you can make an informed decision about your home.

As I see it, you should always research and employ reputable professionals for home improvements.

What is the current UK housing market trends?

According to the Office for National Statistics, the average house price in the UK was £286,000 in April 2023. This figure is £7,000 lower than the peak in September 2022 and £9,000 higher than a year ago. In the 12 months leading to April 2023, average house prices have increased by 3.5%. The increase in the UK property market means that average house prices are £306,000 in England (a 3.7% increase), £213,000 in Wales (2.0%), £187,000 in Scotland (2.0%) and £172,000 in Northern Ireland (5.0%).

An increase in property value can lead to higher equity, meaning homeowners have more resources for home improvements. Furthermore, it is a good idea to consider housing market trends when making a property investment.