For a homeowner, equity is the value of the assets owned. If you bought your home and took out a standard repayment mortgage, then every month you’ll have been paying off some of the money you borrowed as well as the interest accrued.
This should mean that over time, your mortgage will reduce, and you should have some “equity” in your home.
So, what is equity exactly?
Put simply, it’s the market value of your home, minus any outstanding mortgage debt. It is quite literally the amount of your home you actually own. If you’ve paid off your mortgage in full, you’ll have 100% equity.
If you’re not there yet, you’ll have a proportion. For example, if your home is worth £200,000 and your mortgage is £150,000, you’ll have £50,000 of equity.
Can equity increase?
Many homes in the UK have risen in value over the years. So, if your home is worth more now than when you bought it, you have equity.
With a repayment mortgage, your monthly repayments also increase the amount of equity you have in your home, because the more you pay off, the less you owe.
If it has, equity release could hold the key to a more comfortable retirement for you.
How to access your equity
With a lifetime mortgage, you don’t have to downsize or sell your home to access the equity you have. Equity release is a way to get hold of some of the money that’s tied up in your home, while you continue to live in it.
You can usually release somewhere between 20% and 50% of the equity in your home. The exact amount will depend on your age and personal circumstances. Our equity release calculator will give you an idea of how much you could release.
Types of equity release
There are two main ways to release equity without having to move out of your home. One is with a lifetime mortgage. This involves borrowing an agreed amount of tax-free money secured against your home.
Unlike a typical mortgage, you don’t have to make repayments, instead interest is added and everything is repaid when the property is sold - typically, when you die or leave your home permanently (e.g. you go into long-term care).
The other is through a home reversion plan, which lets you sell all or part of your home at a reduced price in exchange for a tax-free cash lump sum or a regular income.
Either way, once any existing mortgage is paid off, you can choose to spend the money on anything you like, from a new conservatory to funding care at home.
How does equity release work?
To apply for equity release you need to be:
- Aged 55+
- A UK homeowner with a property worth over £70,000
The money you release is yours to spend as you wish. There are no monthly repayments as the interest is added to the loan amount each year, and you can keep living in your own home for the rest of your life.
If you haven’t paid off your mortgage yet you could still be eligible for equity release. You’ll just need to use some of your equity to clear your remaining mortgage first – and what’s left is all yours.
Equity Release impacts the size of your estate. Our handy equity release guide has a lot more information to help you. It’s well worth a look if you think releasing equity could be a good option for you. Remember, it’s a big decision and important to seek independent financial advice.
Remortgaging to release equity
Remortgaging your home is another way to release equity. If you’ve been paying off your mortgage for a while – or you’ve paid it in full – you’ll have equity in your home. And it’s this equity that you’ll be borrowing against.
But remortgaging to free equity isn’t always easy if you’re retired or approaching retirement. Individual mortgage lenders have their own maximum age caps and they’ll assess affordability, as your pension, or other assets, will need to cover the cost of repayments as well as the cost of living.
If you’re still unsure of these options, our article titled remortgage or equity release will help you understand the differences.
Equity release is a big decision for anyone to make, and it isn’t right for everyone. It will decrease the value of your estate and the amount you can leave as an inheritance when you die. It may also affect your tax position and entitlement to state benefits. So, always seek advice from an independent financial advisor before you commit to anything.