House prices continue to rise and today the average home in the UK is worth £210,982 – that’s £15,249 more than two years ago*. It’s great news for homeowners, especially those seeking a cash boost in later life. If you’d like to unlock potentially tens of thousands of pounds tied up in your home but don’t want to sell or move house, then you might be thinking about remortgaging or equity release.
To help you get started, here’s a quick guide to both.
Remortgaging your home
Homeowners with an existing mortgage have the option to remortgage in order to raise a cash lump sum from the equity in your home. A remortgage is where you arrange a new mortgage deal that is larger than your existing one.
The money borrowed is often used to consolidate debts such as loans or credit cards, or pay for home improvements that can add value to the property.
Mortgage rates may be starting to rise following the Bank of England’s announcement that the base rate is set to go up this year, but there are still some good deals to be had. Even with the recent rises, compared to where rates used to be some years ago they’re still considered very low.
With house prices continuing to increase, a remortgage deal could enable you to take advantage of the additional equity in your home without having to sell or move house.
For example, if you have your home valued and it has increased from £160,000 to £210,000 since you took out your mortgage, then you could arrange a new mortgage deal to access some of that money.
Can you afford to remortgage?
Locking in to a new mortgage deal is a big decision so you will need to think about it carefully. You will need to pay more each month if you increase your mortgage amount, and it will take you longer to pay off your mortgage if you choose to extend your term.
In addition to this, remortgaging will mean:
- You will need to go through the mortgage application process and provide evidence of your incomings and outgoings
- You may incur various fees (such as exit and arrangement fees) that could eat into the amount of money you borrow
- You will own less of your home than you used to as you will have ‘sold’ that amount of equity back to your mortgage provider
- Your lender may ask you to provide evidence for what you’ve borrowed the money for (quotes from builders for home improvements, or proof you’ve paid off your debts)
- You may not be able to borrow the full amount you need
- You could be refused based on your age, income or credit history
- Your home may be repossessed if you don’t keep up with your repayments
If you’re a homeowner aged 55+ then alternatively, you might be able to unlock some of the equity in your property with an equity release plan.
The money you unlock can be spent in any way you choose, although if you have an existing mortgage then your funds will be used to clear that mortgage first. Your specialist will check to see if you could incur any early repayment charges from your existing provider.
With a lifetime mortgage, you will own 100% of your home, there are no credit checks or mortgage affordability criteria to meet, and you do not need to make any monthly repayments.
This is because the interest is rolled up each month and added to the total loan amount. The loan isn’t usually repaid until the plan comes to an end, usually when you pass away or move into long-term care.
All Equity Release Council approved plans offer a negative equity release guarantee. This means that whatever happens to house prices in the future, you will never owe more than the value of your home when the plan comes to an end.
Flexible lending for homeowners
Equity release could be a better lending option for homeowners in or approaching retirement who are seeking a financial boost in retirement without the burden of monthly repayments.
That said, if you don’t want the interest to roll-up on a compound basis, then there are some flexible plans available that allow you to make voluntary payments to service the interest. This could be a good option for someone wishing to borrow a lump sum without the interest eroding your children’s inheritance, for example. In some cases, the full loan plus interest can be repaid over a number of years.
You may find that with an equity release plan you are able to unlock more equity from your home than if you were to remortgage. This is because your remortgage company will have to factor in your affordability, so will only lend you what you can afford to repay each month from your income. For those on a reduced retirement income, this might be disappointingly small.
As with conventional mortgages, equity release rates are historically low at the moment and there are some good offers to be had, especially when you use an independent specialist like Bower.
Of course, there are some disadvantages to equity release too. For instance, a plan will affect the amount of inheritance you leave and could affect your entitlement to means-tested benefits. Your equity release adviser can explain all of this to you and work out if your entitlements would be affected before you make a decision.
*Nationwide House Price Index