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

At a glance

• Releasing equity from your home can be a great way to supplement your income, make home improvements or gift money to your loved ones.
• There are several options to consider, but most involve some form of borrowing.
• It’s always recommended to seek advice to ensure you’re making the right decision for your circumstances, as the best option will be different for everyone.

If you’ve paid off a large chunk of your mortgage – or if you own your home outright – you’ll have cash (or equity) in your home that you’ll be able to access should you need it. This can be used for a variety of purposes, from home renovations to paying for your child’s university fees, but it’s important to think carefully before you make your decision. Releasing cash from your home isn’t right for everyone and seeking advice is key, but if you’re considering it, you’ll want to know the best ways to release equity from your home.

As with so many things, the answer to this depends on your personal circumstances, such as your age, your property’s current loan-to-value (LTV), how quickly you need the cash and your ability to meet monthly repayments. So, here we discuss the main ways for homeowners to release cash tied up in their home.

Remortgaging

The first option is to remortgage. This allows you to borrow more from your existing mortgage lender that can cover the additional amount you want, and you’ll only have one mortgage secured against your property.

For example, let’s say that Bob has a property worth £300,000, and he owns 60% of it (essentially meaning he has a mortgage at 40% LTV). This means his mortgage value is £120,000, and he has £180,000 in equity. He now wants to use £20,000 of this equity to fund his granddaughter’s university tuition, and he chooses to remortgage in order to do that. This brings his outstanding mortgage balance to £140,000, reduces his equity to £160,000 and increases his LTV to almost 47%.

While this can be a great way to release equity, it’s worth bearing in mind that remortgaging in order to borrow more means you’ll pay more in interest and will have higher repayments for the term of your mortgage, so always factor that into your calculations. You may also need to factor in early repayment charges (ERCs) if you want to remortgage during an initial term, and if your personal circumstances have changed it could be difficult to be approved.

That said, remortgages typically come with lower rates than some of the other options for releasing equity (such as secured loans and equity release), and if you’re staying with your current lender and your circumstances haven’t changed, it should be a fairly straightforward process.

Pros:

• Relatively straightforward
• Lower interest rates
• Suitable for larger borrowing amounts paid back over a longer term

Cons:

• Long terms mean it can be expensive
• Early repayment charges may apply if you’re in an initial mortgage term
• If your circumstances or credit score have changed since taking out the initial mortgage, it could be difficult to borrow more

If you own your home outright, there’s always the option of applying for a standard mortgage. Whether this is an option for you will depend on things like how much you want to borrow, your credit history and when you want to pay it back, so make sure to discuss the options with a broker if you’re unsure.

Secured loans

If speed is important, a secured loan may be a faster alternative to a remortgage, as the application process is often far quicker. They can also be preferable for those who have a poor credit score and would find remortgaging – particularly if they’re looking to borrow more money – more of a challenge. You can check your credit score if you’re unsure, and look for ways to improve it.

They can be a great choice for those looking to consolidate debt, for example, or for those who are in an initial mortgage term and ERCs would make it inappropriate to remortgage. They’re particularly suitable for smaller borrowing amounts you want to pay off fairly quickly, as the shorter term means they can often work out cheaper.
However, the flip side is that secured loans often come with higher rates and fees than remortgages, so it’s important to thoroughly consider your options. Read our guide to see if you should get a secured loan or remortgage.

Secured loans are only available to homeowners (which is why they’re often called homeowner loans), and if you already have a mortgage on your property, the loan will be a “second charge”. This means that if you were to default on your mortgage payments and your home was repossessed the original mortgage lender will be repaid first, which explains why secured loan rates are often higher.

Pros:

• Suitable for smaller borrowing amounts
• Shorter terms mean it can be cheaper overall
• Available to those with a lower credit score

Cons:

• Higher interest rates
• There are often fees to pay
• It’s separate to your mortgage so you’ll have two large credit agreements and repayments to keep up with

You can get a secured loan directly from lenders or can use a secured loans broker, such as Loans Warehouse, to access a wider range of products. The more complex your circumstances the more beneficial a broker can be. They do charge a fee for these services, but their knowledge of the market can make all the difference in finding the right lender.

Find out more about how a secured loan works and compare secured loan interest rates.

Equity release

If you’re aged 55 or over and think you may struggle meeting the affordability requirements of a remortgage or secured loan, equity release could be an alternative.

This allows you to borrow money using your home as security, and you typically won’t need to make any repayments until you go into long-term care or pass away, with the sale of your home being used as repayment.

However, interest is typically charged throughout and will “roll up” during the term, which means there may be a significant amount to repay at the end. This could impact any inheritance you plan to leave behind. Yet some equity release plans will allow you to make partial repayments during the term, and you may be able to “draw down” the amount you borrow rather than taking it as a lump sum, which can reduce the overall amount of interest you’ll have to pay.

Note that there will be eligibility requirements to adhere to – the minimum age is 55 and you’ll need to own a property in the UK that’s worth at least £70,000 – but you won’t normally need to undertake an affordability assessment, and those with poor credit scores can also be considered.

Pros:

• Suitable for older homeowners who may not qualify for other forms of borrowing in later life.
• Repayments don’t always need to be made.
• Providers registered with the Equity Release Council have a ‘no negative equity guarantee’, which means you will never owe more than the property is worth.

Cons:

• Interest is normally compounded which can reduce any inheritance you plan to leave behind.
• Interest rates can be higher than for other forms of borrowing.
• Anything you release is counted as income, which means your entitlement to means-tested state benefits can be impacted.

Equity release typically appeals to older consumers whose borrowing options may be limited elsewhere. Factors which may determine your rate can include your health, credit history and borrowing amounts, so to get a personalised indication of what you might be able to release and what rate you may be charged, speak to our preferred equity release advisers Mortgage Advice Bureau.

The most common form of equity release is a lifetime mortgage, but you may also come across home reversion plans. Here’s a quick overview of the two options.

Lifetime mortgages

Lifetime mortgages are what most people think of when it comes to equity release – you release (or borrow) part of the value of your home, and pay it back when the property is sold. Interest will be charged and compounded during this time, but you likely won’t need to make any repayments.

Yet there are also different types of lifetime mortgages you can consider. You can release everything in a lump sum and be charged interest on the full amount from the start; you can opt for drawdown, where you release equity in stages and only get charged interest on the amounts withdrawn; or you can get interest-only lifetime mortgages, where you make monthly interest payments to reduce the amount of interest being rolled up so there’s less to repay at the end.

The one that’s right for you will depend on a whole range of factors, from your age and affordability status to the amount you want to borrow, so it’s important to discuss the options with an adviser. You can also find out more in our guide to the different types of lifetime mortgage.

Home reversion

Home reversion plans work differently. You’re still able to release equity and stay in your own home without making any repayments, but instead of borrowing the amount from a lender, you’re selling a portion of your home to the equity release provider at less than market value. When the property is eventually sold they’ll get their share back, but this time at full market value.

This means the amount you leave behind will be impacted as your beneficiaries won’t be able to benefit from any increases in the value of the property, as more will go to the provider. For this reason you should think especially carefully about this kind of plan to see if it could work for you. Find out more in our guide to lifetime mortgages vs. home reversion plans.

Retirement interest-only mortgage

A retirement interest-only mortgage is often thought of as a hybrid of standard interest-only mortgages and equity release. Available to those aged 50+, you only need to make interest payments during the term of the mortgage, and repay the capital when the property is eventually sold. They can be an option for older homeowners who already have a mortgage and are looking for an affordable remortgage option in later life, but they can also be taken outright as a way to release equity.

Like many options for borrowing in later life, there are fewer affordability checks and you needn’t worry about repaying the capital (though some mortgages allow partial capital repayment should you wish), and after the eventual sale you’ll be able to leave anything left over to your beneficiaries. Though they still require careful consideration; speaking to a broker is a must.

Pros:

• Monthly repayments will likely be cheaper than a full repayment mortgage.
• Interest doesn’t build up so there’ll be less to repay when the property is sold, and more to leave to your loved ones.
• You can stay in your home without needing to worry about repaying the capital, with the loan only being repaid when the property is sold.

Cons:

• It can be difficult to move home or remortgage.
• You’ll still need to repay the capital which means inheritance can be affected.

Downsize

If you’d rather not have any form of borrowing in later life, selling up and moving to a cheaper property can be another way to release cash, and can leave you mortgage-free. Yet it’s important to consider how much you’ll be left with after things like moving costs have been taken into account, as well as repaying the original mortgage.

Pros:

• You’ll have a smaller property that can be easier and cheaper to maintain.
• You’ll be able to release cash that can repay the mortgage and ideally leave you with some left over.
• You could own 100% of your home, which can form part of your estate and be left as inheritance.

Cons:

• It can be stressful and expensive to move.
• There’s the chance you’ll regret moving to a smaller property.
• If you downsize during a fixed mortgage term, there may be ERCs to pay.

What to consider before releasing equity from your home

However you choose to release equity from your home, there are always a lot of things to consider. These include:

• All options (apart from downsizing) are a form of borrowing, so it’s important to consider how much they’ll cost you in terms of interest and repayments, and what that could mean for your credit profile and LTV.
• Consider how much you want to borrow and when you want to pay it back, as this can affect your product choice.
• Make sure to think about the impact any of these options could have on the inheritance you plan to leave behind and what it could mean for your beneficiaries.
• Many of these options involve additional fees, so always factor in these extra costs to make sure it’s worthwhile.

Releasing equity from your home is a big decision, and the option that’s right for you will depend on a whole range of different factors. Make sure to discuss things thoroughly with an adviser to make the decision that’s right for you and your family.