What is Equity Release?
How Do I Release Equity in My Property?
One of the benefits of getting on the property ladder, besides no longer paying rent to Mr./Mrs/Landlord, is that you have your own home. It is your to do with as you wish.
Another benefit of owning your own home is you can build up equity. You are no longer flushing rent payments each month away, but your monthly payments go to pay off a mortgage loan, and as your property appreciates, you build-up equity.
Appreciation: Appreciation in real estate/property, is when the value of the property goes up, or increases.
A property is said to appreciate in value as it becomes more valuable, or the price of purchasing the property goes up.
An example may be a property purchased for £150,000, is now worth £175,000, it has appreciated £25,000.
We must also note that especially with values of properties, they are only worth what someone is willing to pay for them.
In a supply and demand market, items being sold are reliant on buyers, and if there are no buyers or more sellers than buyers, values can decrease.
Equity: Equity and appreciation go together hand-in-hand.
Equity is the difference between the value of a property (what it can be sold for), and what is owed on the property (the balance of any loans or mortgage(s)).
An example of equity may be this:
A property is purchased for £150,000, and a deposit is made of £15,000, which means a mortgage loan is required for £135,000.
The buyer/borrower pays towards the mortgage each month.
In five (5) years, the property is valued at £175,000, and the mortgage balance is now £130,000, there is equity in the property of £45,000.
By paying down the mortgage, and the property appreciating in value, equity is being built up.
Equity is in essence money, virtual money you cannot see as cash, but as bricks and mortar.
Some see buying a property as building a pension pot. Their homes are their pensions, and when they retire they will cash in this pension.
So how can you access this equity, or realise the equity as it is stated in investment terms?
There are a few ways.
Releasing Equity in a Property
Having the “goose that laid the golden egg”, or in this case, living in the house the is your golden egg, is great, but does you no good if you need or want cash.
There are a few ways to access or release the equity you may have in your property, and not all will appeal to everyone. It will depend on your full set of circumstances, final goals, and how much equity you have in a property.
In addition, most ways to access equity in a property are only going to allow you to access a portion or percentage of the equity, say 70% or so. The only way to access 100% of any equity in a property is to sell the property.
Sell the Property: This is not an option for everyone, but selling the property is one fundamental way to access or release the equity in a property.
Once the sale is complete, you have all the equity the property had to give in cash form, however there are implications in doing this.
One is that you now need to find a new place to live, and second there may be tax implications to deal with.
Remortgaging: Remortgaging to release equity in a property is a common way to gain access to the equity you may have, however, there are different ways to do this, and also implications.
By remortgaging you may gain access to equity you have, but you are also borrowing against your house.
One way to do this is to take out a second charge against the property.
You take out a secured loan against the property, and now you have that cash, but you also have that new monthly secured loan payment. And should you fail to pay that monthly payment, your property is at risk of repossession.
It must be stated that anything you do to access the equity in a property, even if you remortgage and do a “cash-out” remortgage, you will have increased loan payments, and your property is at risk if you fail to pay those payments.
With that being stated, there are some release schemes that allow you to live in the property, and still have access to the cash you may want or need from the equity you have.
Lifetime Mortgages: There are different types of lifetime mortgages, but the basics are you borrow a lump sum of money against the equity in your home, you get to live there, interest is charged, but you do not have to make payments.
The loan is repaid upon your death or if you should need to be placed in long-term care.
With lifetime mortgages you can choose to take a lump sum of cash, or have the money paid to you as an income. Basically using the property as a pension.
There are age restrictions and also again, a maximum percentage that can be borrowed, and the property will not be yours or pass to any family members upon your death, but this does allow you access to any equity you may have.
Home Reversion Plans: This form of accessing equity in a property is where you sell a portion of the equity you may have in a property, but still live in the property as a tenant. You do not pay rent.
You can either choose a lump sum of money, or a monthly amount as income.
Again, there are restrictions on these plans such as the borrower’s age, and the percentage of equity that will be released in the purchase.
As you can see, there are various ways to access or release the equity one may have in a property, and not all ways will appeal to everyone.
The bottom line is that in order to access this equity, the property must be sold, or remortgaged in some manner.