Your home is often your biggest asset. If you’ve spent years paying off your mortgage you may own or be close to owning your house outright.
That feels like a solid place to be, but it can leave you sitting on your money without being able to do anything with it. You may need extra cash for things like home improvements or helping give your grown up children a leg-up onto the property ladder themselves, but as a retiree, it can be hard to access funds.
That’s when using a financial tool to release the value tied up in the bricks and mortar can be a viable option. Equity release and remortgaging are two ways of turning the value of your property into ready cash. In this article, we’ll take a look at both options and discuss the pros and cons of each so you can decide which would best free up your finances.
What is equity?
Equity is the current market value of your house minus the outstanding mortgage debt and any other loans secured against the property. In other words, it’s the value of what you own and hopefully, as you pay the mortgage and the market value increases the equity will increase. The more equity you have, the lower your loan-to-value ratio (or LTV). With a lower LTV, you can access better mortgage deals and interest rates. This will influence your eligibility to remortgage or use equity release.
Why release equity?
You may decide to apply for a financial product to release equity if you want to take advantage of the increase in value of your property without selling up and moving out of your family home.
Typically, the money released is used for:
• Boosting retirement finances
• Home improvements
• Helping children buy property
• Paying off other, more expensive debt.
Your two options for turning capital into cash are equity release and remortgaging. The one that’s best for you will depend on your financial situation and individual circumstances. Everyone is unique which is why it’s crucial to get expert financial advice tailored to you. Read on for an explanation of each one.
Equity release
Equity release is a loan available to the over 55s which is secured against the value of your property. You can sell all or part of your share in return for a tax-free lump sum or a regular income.
It could be right for you if you own your home outright or have a relatively small mortgage. The debt will only be repaid when you or your surviving partner dies or moves into permanent care. You don’t have to worry about making monthly payments, but the loan will be subject to interest. Some providers allow you to make one-off or regular repayments which helps reduce compound interest – and the total debt to be repaid.
There are two types of equity release available:
Home reversion plans
With a home reversion plan you sell all or a percentage of your home to an equity release provider in return for a lump sum, regular payments, or both. This means your home now belongs to the reversion company, but you can carry on living there rent-free until the end of your life or you move out.
Lifetime mortgage
A lifetime mortgage is a long-term secured loan against your home. You receive a lump sum or instalments from the lender and you don’t have to repay anything while you’re still living there. You will remain the legal owner of your property. The loan is repaid from the eventual sale of your property.
Whichever scheme you opt for, it’s best to go with a provider who is part of the equity release council as this protects you from falling into negative equity.
Equity release pros and cons
Pros:
• Your monthly outgoings won’t increase.
• You can access money from your home without having to sell or downsize.
• The money released is tax-free.
• There are no credit checks or mortgage affordability criteria to meet.
• With the equity release council your home won’t fall into negative equity.
Cons:
• You might miss out on means-tested state benefits if you take the money as a lump sum.
• If the local council funds your care at home, either fully or partially, they may start charging you.
• Equity release will reduce the value of your estate and the amount you can leave in your inheritance.• Lifetime mortgages may have higher interest rates than a regular mortgage.
Remortgaging
Remortgaging involves taking out a new mortgage on your current property. This means monthly repayments may increase and the term of the mortgage may be extended. So, while you can remortgage to release some of the equity in your property it is not the same as equity release.
Bear in mind, that your eligibility for a new mortgage will be subject to credit checks and affordability criteria. This means you need to show you can make the monthly repayments.
Although there is no legal age limit for remortgaging, lenders will impose their own rules and may be reluctant to make a loan to older borrowers.
Remortgaging pros and cons
Pros:
• You might be able to switch to a more attractive mortgage product.
• You can use it to pay off more expensive debts.
• You can stay in your home rather than selling.
• As debt is still being paid off, you’ll leave more behind for beneficiaries to inherit.
Cons:
• Taking on a new mortgage means you’re increasing your overall debt and effectively paying more for your house overall.
• There’s a risk of losing your home if you can’t keep up with payments.
• If house prices fall you may end up with negative equity
• Remortgaging can be expensive due to the associated costs such as legal fees, property valuation, and arrangement fees.
• If you’re in your 60s you may find it harder to get a mortgage deal.
Is remortgaging or equity release best for you?
Both equity release and remortgaging are valid ways to borrow against your property. If you want to avoid increasing your monthly outgoings and get a larger amount of cash immediately, equity release might be right for you.
On the other hand, if you’d rather have more of your estate to leave behind in your will and can get a good mortgage deal then remortgaging might suit you better. Both choices pose a financial risk but also offer a chance to free up your cash flow.
At Cooper Associates, we understand that releasing equity from your property is a big step. That’s why we offer expert financial advice to ensure you make the best choice for you. Get in touch today to find out more.
