What is Home Equity?
Home equity represents the ownership value you have in your property. It’s calculated as the difference between your home’s current market value and the outstanding balance on your mortgage or any secured loans. For example, if your home is valued at £300,000 and your remaining mortgage balance is £50,000, your equity amounts to £250,000. Over time, equity can increase as you make mortgage payments, and when your mortgage is fully paid off, your equity equals your home’s total value.
As property values can appreciate significantly over the years, you might find yourself with more equity than initially expected. For instance, average UK property prices have risen nearly 50% in the last decade, according to Nationwide House Price data. Therefore, a home purchased for £178,000 in 2014 could now be valued at £259,880.
How Can I Release Equity from My Home?
There are several options available to access the equity tied up in your home:
- Equity Release: Many homeowners opt for equity release to access funds. Depending on factors like the youngest homeowner’s age and property value, you can unlock a minimum of £10,000 up to 53% of your property’s value. The most common type is a lifetime mortgage, which allows you to retain full ownership of your home. Unlike a regular mortgage, you aren’t required to make regular repayments unless you choose to do so. The loan amount plus accrued interest is typically repaid upon your death or when you move into long-term care.
- Remortgaging: Remortgaging involves replacing your existing mortgage with a new one that’s larger than your current outstanding balance, based on the equity you’ve accumulated. This option requires regular repayments and prevents your debt from increasing over time. Failure to maintain repayments could lead to repossession of your property.
- Home Equity Loan (Second Mortgage): A home equity loan allows you to borrow against the equity in your home, typically repaid in fixed monthly instalments over a set term. These loans often offer lower interest rates compared to unsecured loans due to the property serving as collateral. They are suitable for significant expenses or debt consolidation and may have longer repayment terms.
- Downsizing: Selling your current home and purchasing a smaller or less expensive property can release equity. After settling your existing mortgage, you can use the remaining proceeds as needed. This option not only unlocks equity but also reduces ongoing homeownership expenses.
Before deciding on any equity release option, it’s crucial to consider the potential impacts on inheritance, homeownership, and long-term financial planning. Seeking advice from a specialist advisor can help you navigate these choices and determine the best approach for your individual circumstances. If you opt for equity release, advice is mandatory before proceeding, especially with plans like home reversion or lifetime mortgages that secure debt against your property and affect future financial arrangements, including long-term care funding.
