As a homeowner your home is likely to be your largest asset and there may come a time when you want to access some of that value. But without selling your home and downsizing.
Unless you have already paid off your mortgage, you won’t own all of your property.The part that you do own is known as your equity.
Your equity value is tied up in the bricks and mortar of your home. To access this you could consider remortgaging or taking out an equity release plan. Both of them are mortgages but they work in different ways.
In this article we focus on remortgaging to raise capital and equity release. So please read on to learn more about them, how they work, and how to get the right advice.
What is a remortgage?
A remortgage is where you apply for a new mortgage, with a new lender, but without moving home.
The main reason for remortgaging is because the special interest rate (fixed/tracker etc) you had a few years ago is soon to end. A new mortgage is arranged that replaces the existing mortgage, hopefully with a better deal.
Many people choose to make other changes to their mortgage at this time. It’s possible to change the amount you borrow, up or down, and also to change the remaining term. Obviously, all of this requires you to pass the lenders affordability criteria, plus the normal credit checks.
Remortgaging is also a convenient time to release some of the equity in your home. This extra money could be used for home improvements, a new car or just to give you some extra cash.
If the loan is set up on a repayment basis then you will make monthly repayments and by the time you reach the very end of the mortgage term you will have paid it all back.
Changing who is named on a mortgage can also be done when remortgaging. This is called a transfer of equity and can involve removing someone, adding someone, or perhaps both!
What is equity release?
Equity release is the name of a mortgage product, designed for homeowners over the age of 55. It is also known as a lifetime mortgage.
Like the remortgage above, you would apply to move your existing mortgage (if you have one) to a new lender but without moving house.
An equity release mortgage allows homeowners to tap into the equity in their home and provide them with a tax-free cash sum. Alternatively some lenders will offer a draw-down facility where you can receive payments every month.
Why are the payments tax-free? – Very simply this is because the money you receive is yours. It’s money that is borrowed against your own home equity and there will be no tax to pay regardless of how large the payment may be.
Equity release is a form of later life mortgage and so the lender will charge interest each month. They will nearly all come with a fixed interest rate, often for the full term of the loan.
The lender will not require you to make any monthly repayments. The interest charged is added to your mortgage balance each month, naturally this will then increase as each month passes, making the debt larger.
An equity release lender will only require the loan to be paid off in the event that you die or move in to long term care. There are a range of mortgages suitable for pensioners, and equity release is just one option.
The differences between equity release and remortgaging
Age
For equity release, all of the borrowers have to be aged 55 or over.
With a remortgage you can apply at almost any age but the available options will reduce as you approach retirement age.
Affordability
A remortgage requires you to have sufficient provable income so that you can afford the monthly repayments along with your other commitments.
On the other hand, an equity release mortgage will have no minimum income requirements and will not ask you to prove your income.
Monthly payments
When remortgaging you can choose to have your mortgage setup as interest only, repayment, or part and part. Monthly payments are required for all of these options until the end of the mortgage term.
An equity release lender will not require you to make any monthly repayments. They still charge you mortgage interest but this is added to your debt balance each month.
Repaying the debt
The remortgage lender will require the debt to be repaid in full by the end of the agreed term. This could be via monthly repayments of capital or a lump sum at the end.
The equity release lender will not require you to repay the debt. They only receive their money once you die or move permanently in to long-term care, via the sale of your property.
CONTACT A REMORTGAGE EXPERT
If you wish to investigate your re-mortgage options we can put you in touch with a fully qualified whole of market mortgage broker.
Pros and cons – Equity release
PROS
- You can release equity tax free
- There’s no monthly repayments
- Interest rate fixed for the loan duration
- You will never owe more than your home is worth
- You can spend the money however you want
CONS
- Your mortgage debt increases each month
- You have to be 55 or over
- They normally have higher interest rates
- Less of your estate will be passed to your family
Pros and cons – Remortgaging
PROS
- The interest rate will be competitive
- You can apply at any age
- You will make monthly payments so the debt does not increase
- You can borrow up to 90% LTV
- You can change lender in the future
CONS
- You will need to prove your income
- Monthly payments will be required
- As you get older it can be harder to re-mortgage
- Bad credit can affect the choice of lenders
Is it a good idea to take equity out of your house?
There is no simple answer to this question.
As you can see above, each of the options has its own pros and cons.
For the retired homeowner who is struggling with money, the ability to release some equity will be of great benefit. And along with that comes the dis-advantages.
If you take equity out of your house then you reduce it’s value as an asset. If you do this too much then you may well run out of options, as both equity release and remortgage products have a maximum loan to value.
Can you still move house?
It is still possible to move with both of these mortgages, but there are certain conditions.
REMORTGAGE – You need a home moving mortgage, along with the usual income and affordability checks. This can be with the same lender or a new lender.
EQUITY RELEASE – You can ‘take’ your equity release plan to a new house but the property will need to be valued and approved by your lender. Of particular concern will be the loan to value, if you downsize.
You will find more useful information in our article: Can equity release be transferred to another property?
Getting the right advice
If your home is your most valuable asset, and your mortgage your largest debt, then it would seem prudent to seek expert advice when changing mortgage arrangements or releasing equity.
Respect Mortgages recommends that you use an independent mortgage broker to help you with these financial decisions. Your broker will be qualified and experienced in mortgages of all types, and they have access to the whole of market, giving you maximum choice.
If you feel that an equity release mortgage is your best option then you need to receive independent mortgage advice anyway, with an adviser who is specifically qualified to help with equity release plans.
When considering an equity release plan we recommend customers talk to a specialist member of the Equity Release Council.
The Equity Release Council is a voluntary body which aims to ensure that its members are highly professional and act with integrity and transparency in offering high-quality products and services to customers.
For lifetime mortgages the rate must be fixed for each release or, if variable, the rate must be capped for the life of the loan.
You must have the right to remain in your property for life or until you need to move into long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract.
You have the right to move to another property subject to the new property being acceptable to your product provider as continuing security for your equity release loan.
The product must have a “no negative equity guarantee”. This means that when your property is sold, and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan to your provider, neither you nor your estate will be liable to pay any more.
All customers taking out new plans which meet the Equity Release Council standards must have the right to make penalty free payments, subject to lending criteria.
FREQUENTLY ASKED QUESTIONS
Do you still pay a mortgage with equity release?
There’s no requirement for you to make any monthly payments. However, lenders will allow to you make payments, should you wish to.
Who offers equity release?
There are many lenders offering equity release and the best way to access them is via a specialist equity release adviser.
How old do you need to be?
To qualify for an equity release mortgage you need to be 55 or over.
Is remortgaging the same as releasing equity?
No, remortgaging is not the same as releasing equity. You can remortgage without releasing equity and you can release equity without remortgaging.
