After years of paying off a mortgage, and decades of rising property values, most people find that their home is their biggest asset.
As a result, increasing numbers of older homeowners are considering ways of accessing the wealth tied up in their property and capitalising on their property’s increase in value, without having to sell it.
There are two main ways to achieve this – either remortgage or take out an equity release plan.
Remortgaging to release equity
Most homeowners typically remortgage every 2, 3, or 5 years to secure a better rate and avoid the default interest rate. You can also remortgage to borrow more money against the value of your home.
As property values increase and homeowners make monthly repayments, there is more equity in the property. For example, if you took out a mortgage 20 years ago at 90% LTV, there would have been 10% equity in the property. Now, two decades later, the LTV might be just 30% with 70% equity.
Many people choose to access some of that equity by remortgaging and taking a cash lump sum.
Reasons why people remortgage to release equity:
- To pay off debts and credit cards
- To consolidate their debts into one monthly payment
- To make home improvements
What you need to know about remortgaging to release equity:
- If you borrow more money against the value of your home your monthly repayments will most likely increase to cover the additional loan amount
- If you extend the mortgage term, it will of course take you longer to pay off your mortgage and you will pay more interest over the term
- Your home could be repossessed if you do not keep up with repayments
Taking out an equity release plan
Not everyone meets the eligibility and affordability criteria to remortgage and borrow more money. For example, due to their age, their level of income, and/or their credit history.
In some circumstances, equity release can be a viable solution for those older homeowners looking to unlock some of the cash tied up in their home.
Equity release is suitable for people aged 55 and over, with a property worth at least £70,000. Other eligibility criteria may apply and differ between lenders.
Equity release has soared in popularity in recent years due to the flexibility of new products and more affordable interest rates. With equity release homeowners can unlock tax-free cash in one lump sum or take several smaller sums over time. By releasing smaller sums over time as and when you need the money you can avoid some of the interest.
Remortgaging vs Equity Release
One of the huge advantages of equity release is that you are not obliged to make monthly interest repayments. You can choose to let the interest roll up over the term. The loan plus interest is typically repaid when you die or go into long term care. However, if you remortgage to release equity you need to make monthly repayments which are typically higher because you have borrowed more money.
With equity release there is no threat of repossession, subject to complying with the terms and conditions of the loan. Whereas if you fail to make your monthly repayments on a residential mortgage you are at risk of losing your home.
Reasons why people take equity release:
Older homeowners take out equity release plans for the same reasons why people choose to remortgage and borrow more money; to make home improvements and clear credit card debts.
People also take equity release to:
- Replace an interest-only mortgage that is coming to an end
- Pay for care in later life
- Gift to family
- Reduce IHT liability
- Help their family get onto the property ladder
What you need to know about equity release:
- You must get advice before taking out an equity release loan to ensure that it is suitable for your circumstances
- By unlocking some of the cash tied up in your home you will reduce the value of your estate
- All plans that are approved by the Equity Release Council come with a no negative equity guarantee which means that you will never owe more than your property is worth
- It is not compulsory to make monthly interest repayments, however you can make repayments if you wish to – by making monthly interest repayments you can avoid the effects of compound interest and retain as much equity in your property as possible
So, which is better? Remortgaging or equity release? The answer depends on your individual circumstances.
At Personal Retirement Planning we specialise in all things mortgages and can help you with both equity release and remortgaging.
To learn more, and to discuss your individual requirements, please call us on 07980210953 or email firstname.lastname@example.org.