Equity release is the action of releasing money from your mortgage, if you owe less than your house is worth. For example, if you have a £200,000 house, and have been paying your mortgage down to £120,000, you have £80,000 of equity on the house. Even more if during that time, your house has appreciated to £250,000, leaving you with an equity of £130,000.
If you need money, there are several options for you to finance a project, like taking out a personal loan, charging it on a credit card, or releasing that equity from your house. Banks will generally be happy to process such a loan, as they will keep the house as a guarantee, while personal loans are unsecured. So you should be able to get a better rate, as well as paying the debt over a longer term if you need.
An article about equity release recently caught my eye, as it said 9 in 12 UK regions experienced growth this past year, and more and more households are considering it. 61% of people opting for equity release are couples, while a staggering 60% more single women do it than single men.
For couples, I can easily imagine why. You buy a big house, big enough for your family, then your kids grow and you want to enjoy some cash, either to help them start their adult life or simply to dispose of part of your savings to fund home improvements or a big purchase. As a matter of fact, 58% of people used the cash for home or garden improvements. You would be adding value to your home, for a potential buyer or simply to have a nicer property.
As you grow older, chances are that you are earning more money, and if you are on a fixed mortgage, the extra payments can be the same proportion of your income that they used to be. As an example, you used to have a £500 mortgage on your £2,000 salary, paying 25% of your income each month. A few years later, you make £3,000. Taking on £750 monthly repayments will leave you with a similar financial situation as you were previously, paying 25% of your income into your house.
Does that mean you should release equity from your home? I would be very cautious about the reason why you want some extra money, if you are still a long way from retirement. Releasing equity for home improvement, to convert the attic into a new room to welcome your next kid and at the same time add value to your home sounds like a great idea. It still requires crunching down the number to make sure the works will add more value to the property than their cost.
However, in your 30s or 40s, releasing equity from the house to buy new furniture or go on holidays can be a risky move. As you grow older, you can make that kind of choices since you do not have to pay for your kids’ college tuition anymore, and that allows you to stay in your big home while enjoying some of its value today.
Still, make sure the repayments are affordable and the project will be worth it, as you will be repaying for years to come.