Equity release or remortgaging

Choose the best way to release equity and stay in your home

If you own a property that’s increased in value, you might be thinking about equity release or a remortgage to raise some cash. But do you understand the pros and cons of each, and how do you decide which option would work best for you? We take a look at equity release and remortgaging in more detail to help you decide.

Why consider equity release or a remortgage?

If you own a property, your home is probably your biggest asset. You’ll have contributed a lot of money to it with your mortgage over the years, and its value is likely to have grown over time. Now, you might want to access some of that value, but don’t want to sell up and move out of a home where you’ve enjoyed living and creating memories.

What is home equity?

The equity in your home is its current market value after you take away any outstanding mortgage debt or any other loans you have secured against the property.

For example, if your home is currently worth £250,000 and you have a mortgage of £50,000 outstanding, with no other debts secured against the property, you have equity of £200,000.

There are several ways to access some of this equity:

• Sell your property. You could downsize to a less expensive property and use the remaining funds from the sale to pay off your mortgage or fund your lifestyle.
• Remortgage your property. If you don’t want to sell, you could remortgage your home to access some of the equity, as long as you are eligible and meet the affordability criteria.
• Take out equity release. Available for people 55 and over, a lifetime mortgage can allow you to access some of your home’s value without having to sell.

If you want to access some of the value in your home without moving, then remortgaging or equity release are your choices. Although equity release isn’t the same as a remortgage, they do have some things in common.

How does remortgaging to release equity work?

Remortgaging means taking out a new mortgage on your existing property, using the equity you’ve built up in your home as security. The new mortgage gives you access to some of the value that’s built up in your home so that you can use it how you wish.

Things to consider when remortgaging:

• You can remortgage to release equity, but usually you'll need to have built up a large portion that you own outright before you can do this.
• You’ll need to demonstrate that you can afford to make monthly repayments and will need to meet a lender’s income, affordability and credit rating criteria.
• Lenders may be more reluctant to make a loan to older borrowers.

Can you release equity without remortgaging?

Remortgaging isn't the only way you can release equity from your property. You could also consider equity release. Equity release is available for homeowners who are aged 55 or older. There are also other eligibility criteria you need to meet, such as the type and value of your property.

How does equity release work?

Equity release gives you access to some of the value that's locked in your home without the need to move or downsize. The money you release is tax-free.

There are two main types of equity release to consider:

• A home reversion plan: you sell all or a percentage of your home to a provider and receive a lump sum, regular payments or both in return.
• A lifetime mortgage: you take out a long-term loan secured against your home that you don’t have to pay off while you’re still living there.

What’s the difference between remortgaging and equity release?

The main difference between remortgaging and equity release is around how the money you borrow is repaid. A remortgage will require you to meet a lender’s affordability criteria and to make regular monthly repayments. With equity release, you don’t need to meet affordability or income criteria, as the money is usually repaid from the sale of your property when you, or both of you if borrowing jointly, die or move into long-term care.

Things to consider with equity release:

• Your monthly outgoings won’t increase. Unless you choose to make monthly interest payments, which you can do with some lifetime mortgages, the only costs you’ll have to pay will be for setting up your plan, such as valuation, legal and advice fees.
• You can take money out of your home when you need it. Some providers offer a “drawdown” option, which means that you agree a total amount of equity that can be released from your home, but only take out the money in smaller amounts as you need it.
• Lifetime mortgage interest charges add to your debt. Most people choose to let the interest on a lifetime mortgage 'roll up' (or compound) - it gets added to the borrowed amount, and both are paid off together when the house is sold. But with some lifetime mortgages, you can choose to pay all or some of the monthly interest as it arises.
• You could miss out on some means-tested state benefits. If you take the money as a lump sum, this may affect your eligibility for some state benefits and that could take away money that you rely on for living expenses.
• Your beneficiaries will get a smaller inheritance. If you take out equity release, it's likely at least some of the value of your home will have to go to repay the provider when the last borrower dies or moves into long-term care, which means your beneficiaries will get a smaller inheritance. With a lifetime mortgage, if you or your beneficiaries have other means to repay the amount owed, then the home may not need to be sold.

Remortgaging or equity release: which works best for you?

Whether you choose equity release or to remortgage will depend on your particular situation. Here are some things to think about when you’re looking at equity release or remortgaging:

• What’s your income? With a remortgage you will need to make monthly repayments, but with equity release you won’t need to do this unless you choose to.
• How old are you and are you borrowing jointly? Remortgage lenders consider age when you apply – you may find it more challenging to find good deals if you’re nearing retirement. To be eligible for equity release, the youngest borrower needs to be 55 or older.
• How much are you looking to release? Depending on the value of your property and your financial situation, you’re likely to release more capital through equity release. Because equity release isn’t dependent on your income, lenders may release more money than through a remortgage that needs to be repaid monthly.
• How much can you afford? Remortgaging often proves the cheaper option overall. Lifetime mortgage rates are higher than standard mortgage rates because the loan term is potentially much longer. And when the interest is added to the original loan it’s rolled up over time, meaning the unpaid interest is added to the loan, so you end up paying back more.

You should take professional advice to make sure you fully understand the pros and cons of equity release or remortgaging, and whether either is the right solution for you.