8 Mar 2018
Author: Stephen Breen
With house values soaring and 34% of households owning their homes without a mortgage (Source: English Housing Survey), it has never been more tempting to release some of that locked-up cash. Whilst properties are worth on average almost £70,000 more than they were a decade ago, homeowners in the South of England have fared especially well with the greatest amount of equity held in this region amongst those aged over 55.
Homeowners looking to release equity have five options open to them: mortgage/remortgage, take an additional mortgage, sell up and downsize, sell up and rent, or use an equity release scheme. The right choice will depend on individual circumstances and goals. Although the decision involves your property, it is certainly financial in nature – and independent financial advice is recommended.
If you own your home outright, taking out a mortgage could be the easiest way to release some of the equity. If you already have a mortgage, remortgaging – that is, taking a loan that is greater than the original one – allows you to take advantage of the increase in your home’s value. There are some brilliant deals that may even beat your current rate, particularly if your loan has reverted to the lender’s SVR (Standard Variable Rate) on the expiry of a fixed term deal. However, it’s important to weigh up all the costs including the arrangement fees and any redemption penalties for paying off your old loan.
An alternative to remortgaging is taking out a second mortgage, entirely separate from the first. This might be a good option for you if the redemption penalty on your first mortgage would not be substantially offset by securing a better mortgage interest rate. It may also be an option for you if your original lender will not advance you additional funds, due to the introduction of more difficult lending criteria. However, note that your original mortgage will take priority over your second mortgage and if your home were to be repossessed, the first mortgage would be cleared off first. Therefore the rates available for second mortgages may be less favourable.
Whether you mortgage, remortgage or take an additional mortgage, you’ll need to take steps to give yourself the best chance of being accepted and securing a low rate of interest. Ensure you have a clean credit record with any debts or overdrafts paid up, conduct an audit of what’s going out of your accounts and reign in any excesses in the months leading up to your application. Lenders look at your spending forensically under today’s more stringent criteria and will take into account childcare, mobile phone contracts, gym memberships and habitual spending such as dining out when making their decision.
If your children have flown the nest, downsizing is another way to unlock some of the extra value in your property. However, before you decide to up and move, consider the numerous hidden costs of moving home which may make a move less appealing. Rightmove estimate that to sell a £385,000 property and purchase a £250,000 property in Liverpool, expenses would total £11,930 including stamp duty, legal fees, estate agency fees, removal costs and other miscellaneous expenses. In addition to this, you’ll need to factor in any redecorating and improvement work you’d like to carry out on your new home.
A further consideration is that you’ll reduce the amount of money that your children or grandchildren will inherit.
If you sell up your home and rent, you’ll free up equity, although remember that you’ll still have all the expenses of moving to deduct, along with the settlement on any existing mortgage. Pros of renting include that you won’t have to pay to maintain your property and you can easily move if you want to. Cons include the fact that you’ll be spending on rent without acquiring any capital for it, and you have little security. The majority of tenancies are for 6 months, after which your landlord can ask you to leave. Even good tenants may find themselves having to move regularly with landlords needing to sell as circumstances change.
A further disadvantage of renting is that you won’t benefit from future rises in house values. Savills predict 14.2% compound growth in house prices from 2018 to 2022 – making home ownership an attractive investment.
A final option to consider is to use an equity release scheme. This allows homeowners aged over 55 to unlock the value of their home but continue to live in it. These schemes were once frowned upon due to past problems but the sector now benefits from improved regulation.
There are different schemes available: interest only lifetime mortgages, lifetime mortgages and home reversion plans.
An interest only lifetime mortgage is as it sounds: you borrow against the value of your home, continue to live in the home and pay some or all of the mortgage interest each month. The capital sum and any outstanding interest is repaid when your home is sold.
A lifetime mortgage is similar, except that you won’t make any repayments. The interest is added to the amount owed and both capital/interest are repaid when the property is sold.
Finally, a home reversion plan allows you to sell some or all of your home at a discount to the provider, in exchange for the right to stay there for life.
It is essential to take independent financial advice before considering any equity release scheme. Often these will be the most expensive way to release equity and other options may be preferable.