Are you considering releasing some of the equity that has built up in your property? If so, you might be wondering how best to do it. In reality a lot will depend on your situation, how much equity you have in your property and how much of it you wish to release.
As such it makes sense to consider all the options before deciding which one is going to be best for you. It is very important to understand that although one option might be best for one person, that same option may not be right for you. Let’s take a look at the different options you have to consider.
Releasing equity by remortgaging
A remortgage is basically the act of swapping your existing mortgage for a different one. This could be with the same provider your existing mortgage is with, or a completely new one. The chances are you’ll have to pay a fee for paying off their mortgage in favour of the new one. You also have to add in the cost of getting your property surveyed again, not to mention getting a new valuation.
Let’s say you bought your property years ago for £75,000 with a mortgage value of £65,000. Your property is now worth £150,000 and your mortgage has reduced to £35,000. This means you have £115,000-worth of equity in your home. You could in theory release part of that in order to make improvements or to help you with day-to-day expenses or outstanding bills. However you need to spend some time crunching the numbers to ensure you can still afford to pay the monthly repayments on your new mortgage.
You also need to bear in mind you’ll need to make the repayments on the extra money you borrow. If you currently have a mortgage that has reduced to £35,000 and you want to borrow £15,000, you’ll now have a mortgage of £50,000 to make repayments on. As such you need to calculate all the figures to determine whether this is the best option for you.
Potential equity release
Equity release can only be done if you have already paid off your home in full. It is also only suitable for those who have retired. Many people opt to take this route if they need extra finance to get them through retirement without having to make regular repayments on the amount they borrow.
You can opt for a home reversion option whereby a portion of your home (or on occasion all of it) is sold to the scheme provider. They then pay you for that portion, either by way of a lump sum or through a series of payments made at regular intervals. The home remains yours until you die however. The other, more popular, option is to take out what’s called a lifetime mortgage. The essential difference between this and a regular mortgage is that you aren’t required to make any monthly payments to start paying it off. Instead, the amount is paid back (including interest that is added to the sum throughout the length of the term) from your estate when you die.
For many people this is the ideal way to ensure they can remain in their own home. While it is possible to move home and downside to free up some cash, this isn’t suitable or practical for everyone. Equity release makes it possible to get the best of all worlds, providing there is no intention to move at any point. This would usually trigger the repayment of the mortgage taken out on the property. As with all options listed here, it is vitally important to consider all the pros and cons before making a decision. This will ensure you make the best decision for your particular situation.
A secured loan is a type of loan that is backed by some sort of collateral. In most cases this means the loan is secured on your home. In some cases it is called a home equity loan, but the two are basically the same. You will usually find it is easier to get a secured loan than an unsecured one.
Of course you will need to make regular monthly repayments on a secured loan. If you fall behind with these payments there is a chance you could lose your home. You should be fully aware of the potential dangers and be certain you can make the repayments at all times, as your home could be in jeopardy if you can’t. Remember you will still have your mortgage payments to pay as well, so any secured loan you take on will need to be paid in addition to the separate mortgage payments.
People use secured loans for all kinds of reasons. Typically they may use one for paying off other debts, buying a car or perhaps doing some home improvements. It is not typically used to provide an income in the same way equity release might be.
Which option would be best for you?
As you can probably see, the option you choose will largely depend on why you are looking to gain access to additional cash in the first place. Equity release may be ideal if you are retired and you do not want additional monthly payments to make. Conversely younger people may prefer a secured loan or a remortgage if they want a finite amount of cash to invest in home improvements. These could add to the value of their home too.
By carefully evaluating each option and assessing your own situation, you can more easily find the right choice for you.