Home equity is the amount of value you own in your home outright, calculated by subtracting you existing mortgage balance away from the current home’s market value. You can utilise your home equity in a process known as equity release. This is when you take out credit and use the home equity as security within the credit agreement.
Using equity release products can help the homeowner access significant amounts of credit not available through personal loans, and dependent on the homeowner’s credit score and finances, they could get a lower rate of interest on repayments. Home equity release can be achieved through home equity loans, HELOCs, or through various types of equity release mortgages.
What can you use equity release for?
The money you release from home equity can be used for an array of reasons without restrictions. Some of the most common reasons that homeowners release equity is to:
- Complete home renovations
- Consolidate debts into their new mortgage
- Help family out with finances (possibly to get on the property ladder)
- Make retirement more comfortable
- Pay for education or medical expenses
- Buy big-ticket items, such as a car or round-the-world trip
What are the pros and cons of equity release?
The benefits of home equity loans are:
Access to significant credit – lenders typically offer to lend up to 80-85% of your home equity. Thus, if you have £100,000 home equity you might be able to get a loan worth £85,000. This type of credit is not available through conventional personal loans and could pay for significant home renovations.
Competitive interest rates – by securing the credit agreement with home equity a lender is usually able to offer lower interest rates than other credit options offer, but this will depend on personal circumstances.
The drawbacks of equity release are that you are putting your home on the line. If you do not keep up with repayments, you could lose your home. Moreover, you may be subject to closing costs at the end of the loan or mortgage, and these can be hundreds if not thousands of pounds. You may also increase your chances of getting into negative equity.
What are equity release mortgages?
Equity release mortgages are a type of mortgage that allows the homeowner to tap into some of their available home equity. This is done by taking out a new mortgage that borrows more than what needs to be repaid on the first mortgage, or by taking out a new line of credit on a property that is already owned outright.