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Unlocking Cash from Your Property: When Equity Release Makes Sense

With rising property prices across the UK in recent decades, many homeowners have accumulated considerable untapped wealth tied up in their homes. Unlocking this equity can provide access to vital funding for everything from consolidating debts to financing home improvements, special purchases or other major expenses. For older homeowners, it also offers a way to supplement retirement income. But how exactly can you go about extracting equity from your property? This guide explains the main options available.

Understanding Your Current Equity Levels

Before considering how much equity can I release from my home? First calculate how much is realistically available. This involves establishing your property’s current market value then deducting any outstanding mortgage still owed on it. Online sites can estimate values by entering some basic property details. However, for a formal valuation, instructing a chartered surveyor or valuer may be worthwhile. This provides professional clarity on exactly how much equity exists, ensuring you only borrow realistic amounts. Factoring in potential selling costs like estate agent fees can also give a more accurate figure to work with.

Second Mortgages

One straightforward way of tapping into property wealth is arranging a second charge mortgage with a lender. This works similarly to regular mortgages whereby you borrow an agreed amount against the property to be repaid over an arranged term. However, the loan is supplemented as a second charge on top of your existing mortgage. Lenders offering such second mortgages typically allow borrowing up to 75% of remaining equity.

Advantages of this approach include typically lower interest rates compared to other products and greater flexibility over loan length enabling smaller monthly repayments. Disadvantages are affordability and credit checks to qualify plus discipline needed to meet repayment schedules. Arrangement/valuation fees also apply. If subsequently struggling financially, the property could still be repossessed.

Withdrawing Cash from Existing Mortgages

People tied into current low-rate mortgage deals can also potentially withdraw additional cash value if the property has increased substantially since first purchasing. This involves remortgaging or a further advance with your existing lender. Following a new property appraisal, they may approve extracting 20-25% extra equity beyond original sums borrowed. This gets rolled into an enlarged mortgage on improved terms and rates reflecting current stronger lending positions.

This route avoids costs and administration of setting up second mortgages whilst still allowing you to keep preferential rates. However, such deals depend on lenders approving new valuations. Be mindful increased mortgage sizes also mean bigger regular repayments. Without plans to repay sums withdrawn, people risk losing homes falling into negative equity if house prices drop.

Lifetime Mortgages

Specialist equity release mortgages can provide homeowners over 55 a flexible way of utilising property wealth without needing repayments. Known as lifetime mortgages, here borrowers take out loans against their home which only get repaid when they pass away or move into long-term care. Lifetime mortgages are generally more expensive than standard products with higher interest rates. However, as funds released aren’t paid back until the property is sold, monthly outgoings don’t rise.

Loans are calculated based on your age with older applicants qualifying for bigger amounts as less interest builds up before repayment. Lifetime mortgages can be taken as fixed lump sums, smaller gradual drawdowns or via optional repayments to minimise debts accruing. However, no repayments means overall interest owed ultimately eats further into final property equity. This could jeopardise inheritances so independent financial advice securing deals with inheritance guarantees is crucial.

Home Reversion Schemes

Equity release plans are also possible via home reversion programmes although these are less common. Similar to lifetime mortgages, these involve homeowners aged over 60 signing over a share of their property’s ownership. In return you receive a tax-free lump sum or regular income based on the share sold and current market valuation. Providers offer reversion plans include James Dean, Bridgewater and Age Partnership.

When your property is finally sold – because of moving into care or death – the reversion company receives its proportional entitlement worth potentially decades more than original sums paid. Effectively they invest money upfront to later secure increased property profits. Whilst straightforward providing instant access to cash, home reversions reduce final sums inheritable by families. Always consult financial advisors to see if better equity release options exist.

In Conclusion

Unlocking housing equity provides a useful capital injection once needed. However, any funds drawn down get clawed back eventually through mortgage repayments or reduced inheritances. Different solutions suit individual circumstances better. Contrast lifetime mortgages vs remortgaging options and consider combining smaller second mortgages with existing lending to restrict outgoings. Seeking professional guidance ensures you maximise accessible equity via the optimal approach. Be realistic with valuations and what is affordable longer-term. Releasing wealth from homes is simple yet should be done carefully with full awareness of potential consequences.