How do you release equity from your home?

This content was reviewed and approved by Amy Fletcher.

The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to an equity release adviser.

As house prices continue to rise alongside the increasing cost-of-living, it’s no surprise that people are looking to release equity built up in their home to help ease financial difficulties.

This article will discuss equity release generally, looking at the options for under 55s and over 55s when it comes to releasing equity from your home.

What is equity?

The equity of your home is the difference between the amount you owe on a mortgage and what the home is worth. It's the portion of the property’s value that you hold. The rest, or the loan on the property is often referred to as the loan-to-value ratio (LTV). Using the loan-to-value (LTV) ratio illustrates the amount of equity held in a property by demonstrating the outstanding balance on one's mortgage loan versus the portion of the property's value that you own outright.

For example, if you bought a home for £100,000 with a £90,000 mortgage, the LTV would be 90% and you would have £10,000 of equity. However, if you’d bought the house 10 years ago and had been paying off your mortgage as well, then your LTV could be a lot lower and your equity higher.

What does equity release mean?

Releasing equity means to get some, or all, of the equity you’ve built up in your home as cash. It’s simple on paper, but in practice, there are many considerations. There are financial products available under the banner of equity release, which can assist you in getting access to your equity. In the UK, these are only available if your over 55. If you’re under 55, the options for releasing equity are vastly different. 

One of the ways that anyone of any age can release equity is by downsizing or moving to an area with cheaper prices. While this is not necessarily what people might associate with equity release, it is essentially a way to release equity. This way, when you sell your current home you’ll be able to keep some of that money, or put it into your new deposit. This may not be an option for everybody however, as moving house involves a lot of paperwork and can cause a lot of stress.

Options for releasing equity for those under 55

For those under 55 who want to release equity without moving home, there are two options that are commonly used. Remortgaging, where you change mortgages to one with a higher LTV than you currently have, or a homeowner loan (also called a secured loan or second charge mortgage).

Remortgaging

Remortgaging can be an approach to releasing equity. If you’ve paid off a portion of your mortgage or know that your property has increased in value since you purchased it, then remortgaging could be an option to explore.

With remortgaging, a mortgage broker will look at your property price, your remaining mortgage repayment amount, your age and working status. They’ll be able to tell you what your options are, as well as any fees you may need to pay.

Things to consider about remortgaging

• Your retirement age will affect how much you can borrow, and whether a mortgage provider is willing to lend to you
• You won’t have two loans running concurrently, instead it may be your mortgage payments increase
• Depending on your current mortgage, you may have to pay early repayment fees
• If house prices drop you could end up in negative equity as the size of your loan is larger than the property value
• As with your current mortgage, you’ll have to keep up with the mortgage repayments or risk repossession
• In some cases, the lump sum of money that you release could affect your entitlement to any means-tested benefits that you may receive now or in the future

Homeowner loans

A homeowner loan, also called a secured loan or second charge mortgage, is a way to get a lump sum of money without remortgaging. It’s an additional loan on top of your current mortgage, and you don’t have to pay any early repayment fees like you might with a remortgage. It can help if you need to debt consolidate, make a series of home improvements or fund a large necessary purchase.

As the loan is against your home, it is considered secured so you may be able to borrow more than with a personal loan you would get from a bank.

Things to consider about homeowner loans

• Your credit score will impact how much you can borrow, however you may be eligible even with a poor credit history
• You may be advised that a homeowner loan isn’t right for you
• You can borrow more than with an unsecured loan
• The length to arrange is often longer than a personal loan, so if you need the money quickly, it may be trickier
• Missed repayments could still mean your home is repossessed

Options for releasing equity for those over 55

If you’re over 55, then you have different options for releasing equity. This is the range of products people most often associate with the term “equity release". Equity release for over 55s includes lifetime mortgages and home reversion plans. These are different to remortgaging or homeowner loans as there is often no monthly repayment involved.

Lifetime mortgages

Lifetime mortgages provide the homeowner(s) with cash that was tied up in their home. The lifetime mortgage is secured against the property. The interest from a lifetime mortgage is rolled up into the loan total and builds up for as long as you have the mortgage. Interest is charged on the total amount borrowed and to the interest already added. This quickly increases the amount you owe. 

A lifetime mortgage is repaid when the last borrower either passes away or moves into long-term care and the home is sold. The money made from the home sale then repays the loan amount including accrued interest and the remainder is passed on to the estate.

You can get a lifetime mortgage as a lump sum, or a series of regular smaller sums called a drawdown.

Things to consider about lifetime mortgages

• Interest is compound, so can add up very quickly
• Repayment options are possible but depends on the provider
• Interest rates are fixed at the point at which you take the loan out and are secured for the duration of the loan
• The amount of inheritance you leave may be greatly reduced
• If you have an existing mortgage, it will have to be paid off in its entirety when the lifetime mortgage completes.

Home reversion plans

Home reversions plans are offered by specific home reversion providers. These providers will buy a share of your home and in return you get a tax-free lump sum and live in the home rent free or pay a nominal sum. You also agree to keep the home in a saleable condition and may have inspections to ensure this is the case.

When the last occupant of the home passes away or moves into long-term care the home is sold and the home reversion company receives the money for the share they purchased and your estate receives the other percentage.

Things to consider about home reversion plans

• Certain homes are not eligible for home reversion plans or homes in a poor state of repair
• You may have to pay a nominal sum of rent each month or year with some providers
• You have to keep your home in a certain state of repair
• The amount you get from the home reversion provider is calculated at around 60% of market value so you may get less money than anticipated

At LV= we don’t currently offer advice on home reversion plans.

What do you do to start the equity release process?

The best thing to do if you are considering a form of equity release is to speak to a financial adviser or equity release advice provider. They will provide you with the information needed to ensure you are making the right decision for you and your finances. It may be that a financial adviser recommends that you don’t release equity if they don’t think it is in your best interests.

The adviser you choose must be FCA regulated, and if they are a member of the Equity Release Council then you can be even more confident they are acting in your best interests.

LV= offer FCA regulated equity release advice

If you’re looking to release equity and are nearing or over 55, then LV=’s equity release advisers can help you. We look at the whole of the market to see what, if any, equity release product is right for you.

Request a commitment free callback today to see what help LV= could give you.