House prices in most parts of the UK have soared over recent years, and with the cost of living rising, you might be wondering whether to release some of the money tied up in your home to help make ends meet.
There are a number of ways you might be able to unlock some of your property wealth. However these options usually involve a major financial commitment and so shouldn’t be entered into lightly, or without first seeking professional financial advice.
Here’s a rundown of the main ways you might be able to take money out of your home, and some things to consider before you commit to anything.
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
Equity release to cover living costs
If you want to access some of the wealth tied up in your property, but don’t want to make monthly repayments, then equity release might be an option to consider. Remember however, that interest on equity release plans can quickly add up, making it an expensive option in the long run.
Covering day-to-day costs is one of the most popular reasons for releasing equity, with 20% of equity release applications this year stating this as their main reason for applying, according to Canada Life.
What is equity release?
Equity release, as the name suggests, is a way for homeowners aged 55 and over to release some of the funds tied up in their home. It’s possible to opt either for a lump sum, regular income payments or a combination of both.
With equity release plans, unlike a standard residential mortgage, you don’t need to make monthly repayments against the money you’ve borrowed and the interest that builds up. Instead, you’ll only pay this back when you die or move into long-term care.
What else do you need to consider about equity release?
Before you choose to apply for an equity release product, there’s a few things to be aware of first, not least the risks involved.
The main risk of equity release is that you (or your estate) could end up paying back a lot more than you borrowed in the first place, as interest charges mount up over time.
You can read more about equity release and its pros and cons in our articles Equity release – what is it and how does it work, Benefits of an equity release plan and Equity release – what are the risks?
When considering equity release providers, make sure you choose one that’s a member of the Equity Release Council (ERC), which is the trade body for the equity release sector. Members of the ERC commit to meeting certain standards and providing guarantees such as a ‘no negative equity guarantee’ which means you’ll never owe more than your house is worth.
If you think equity release might be a good option, in the UK it’s currently a regulatory requirement from the Financial Conduct Authority (FCA) that you speak to a qualified financial advisor to ensure that it is suitable for your circumstances, and that you are making an informed decision.
Remortgaging to release money
If you’re looking to release a lump sum from your property, but are happy to make monthly repayments on it for an extended period, then remortgaging might be an option to consider. However, if you’re already struggling to keep up with your current monthly outgoings, remortgaging is likely to increase your monthly costs, unless you opt for a longer mortgage term, so this might not be the best option for you.
What is remortgaging?
If you’ve been a homeowner for some time, the chances are you’ll be all too familiar with remortgaging. While you’re probably more used to remortgaging to reduce your monthly payments, if you want a lump sum to cover day-to-day living costs then you might choose to remortgage to take some of the equity out of your home.
If you’ve already repaid your mortgage and want to remortgage to borrow more, as you own the whole property, you should be in a strong position to do so. Depending on how much you want to borrow, lenders will usually offer you more favourable rates than if you had only partially repaid your mortgage. This is because you’ll usually be looking for a lower Loan to Value (LTV), which is the ratio of the size of your mortgage against the actual property value. Lenders usually reserve the best rates for people with LTVs of 60% or less, which means the homeowner is borrowing 60% of the property’s value, and has 40% in equity.
If you’ve partially repaid your mortgage, when you remortgage to borrow more you’ll be asking your current lender, or a new one, for more money than you currently owe.
What else do you need to consider about remortgaging?
When remortgaging, your lender will normally want to know what you intend to do with any additional funds you’d like, for example, whether you plan to use the money to consolidate debts or cover other day-to-day costs. It’s also important to remember that your lender doesn’t have to accept your remortgage application. Before a mortgage provider will give you any money, they’ll carry out income affordability assessments on you, so if you’re already stretched financially, this is likely to affect the amount you can borrow.
You’ll also need to think about your future plans, as if your new mortgage term overlaps with your retirement, your lender will factor in any fall in income you might experience to check the repayments will still be affordable. You can find out more about this in our guide Mortgages for over 50s: What you need to know.
It’s important to remember that when you remortgage to borrow more, your monthly payments will probably go up and you’ll drive down the amount of equity you own in your property in the process.
If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Retirement interest-only mortgages
If you don’t want to take out an equity release plan and remortgaging would leave you with monthly payments you can’t afford, then a retirement interest-only (RIO) mortgage might be one option to consider.
What is a RIO mortgage?
RIO mortgages work a lot like a standard mortgage in so far as you borrow a sum of money and are charged interest on this. However, the big difference is that RIO mortgages don’t have a set term, you only pay the interest on the amount you borrow and will only need to repay the capital borrowed either when you move out of your property or pass away.
RIO mortgages are designed for people over the age of 55 and because you only pay the interest on the amount you borrow, your monthly payments are likely to be lower than with a standard mortgage, largely with the assumption that it will be more affordable on a retirement income. You can read more about RIO mortgages in our article How retirement interest-only mortgages work.
What else do you need to consider about RIO Mortgages?
RIO mortgages aren’t without catches, and you might find it hard to get approved for a RIO mortgage, especially if you’re trying to borrow a large sum. Much like any other mortgage, your lender will want to know that you’ll be able to repay the loan, and you’ll need to be able to prove you can still afford your payments once you retire.
Another important point to understand is that unlike equity release plans, with RIO mortgages there’s no ‘no negative equity’ guarantee. This means that , if property prices fall sharply in future, you’ll still have to repay what you owe even if your mortgage ends up being higher than the value of your home.
You can read more about the pros and cons of RIO mortgages in our article What are the pros and cons of a retirement interest-only mortgage? and how they compare to lifetime mortgages in our guide What’s the difference between a lifetime mortgage and a retirement interest-only mortgage?
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Downsizing to a cheaper property
While it’s not an option that will work for everyone, selling your property and downsizing to a cheaper or smaller home could mean you can release some of the wealth tied up in it.
Often this option is most useful for people who live in larger family homes whose children have grown up and moved out and if you’re willing to relocate, you might find that you don’t have to settle for a smaller home. While property values have risen across the board, the average price for property varies hugely from region to region. For example, the average property price in London is nearly £538,000, while equivalent-sized properties in the North East cost an average of just under £158,000.
The biggest benefit of downsizing to release some of your property wealth is that you’re not taking on any extra debt, so you don’t have to worry about interest charges mounting up.
Of course, buying and selling properties is expensive in itself and it’s important to factor in the fees and costs involved. For more information on this have a look at our articles How much does it cost to move house and Mortgage costs and fees explained.
If you think downsizing could be a good option for you, our article Five questions to ask yourself if you’re considering downsizing your home has some key things you might want to consider before taking the plunge.
If you’re looking for somewhere to start, you can get expert advice from an independent equity release specialist with Unbiased. They’ll listen to your needs and talk you through your options, so you can decide if equity release is the right option for you.
Finally...
Times are tough at the moment, and while taking money out of your property might seem like the only solution, it’s really important not to rush into any decisions.
While all of the below options might help you release money from your property, none of them are without a hefty financial commitment, and you might find that there are some more easily accessible options open to you. So, if you’re starting to struggle financially, it’s important that you talk to someone about it.
There are a number of free sources of advice available that can help you understand your financial situation and explore the options available to you. These include:
- Citizens Advice – 0800 144 8848 (England) 0800 702 2020 (Wales)
- StepChange – 0800 138 1111.
- National Debtline – 0808 808 4000
- PayPlan – 0800 280 2816
Whatever happens, don’t suffer in silence, as struggling with financial worries on your own can take a real toll on your mental health. If you are finding it hard to cope, our article Are money worries affecting your mental health? explains where to go for help if you need someone to talk to.
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