Remortgage or equity release?

Why would you consider remortgaging or equity release?

As a homeowner, your house is likely your biggest asset and there may come a time when you want to access some of the value of it without having to sell.

You'll probably have had to take out a mortgage to buy your house. And it's a big investment, but it's likely one that has continued to grow in value.

Unless you've paid off your mortgage in full, you won't own the entirety of your home, but what you do own would also have gone up in value.

This value, known as equity, is tied up in bricks and mortar so to access it you may want to consider remortgaging or taking out an equity release plan.

Read on to learn more about these two options. We'll also compare remortgaging vs equity release to help you make an informed decision based on your circumstances.

What is your home's equity?

Equity is the market value of your house, minus the outstanding mortgage debt and any other loans secured against the property.

To give an example, if your home is worth £200,000 and you owe £150,000 on your mortgage with no other loans secured against the property, you have £50,000 of equity.

Your equity can increase if...

• The overall value of your property increases compared to when you bought it;
• You make repayments over time to pay off the mortgage or any other loans secured against the property.

If you have equity in your home and you'd like to access some of that value, there are different ways to do it.

One option is to move or downsize to a smaller, cheaper property. That means you'd pay off any remaining mortgage and you could keep any amount left over, minus any solicitor's costs and other fees.

If you don't want to move, you could borrow money against the equity in your home instead. Depending on your age and circumstances, you could consider releasing money from your home through remortgaging or taking out an equity release plan.

Many people decide to do this to improve their financial situation in retirement or fund home improvements.

 

How does remortgaging to raise capital work?

If you're wondering how to remortgage to raise capital and free up funds, it's a little bit different to taking out a completely new mortgage when you buy a property.

That's because you already own your own home and you've probably been paying off your mortgage for a while, or you may have paid it off altogether.

This means you've built up equity in your property over time, which is the value you're borrowing against.

In general, the more equity you have, the better the position you're in because the amount of money you owe compared to the value of your home will be lower.

Most people remortgage to get a better rate on their monthly repayments. But if you do have some equity in your property this is when you could seek to take advantage of some of it.

But for older borrowers, there are many other things to consider when it comes to remortgaging to raise capital.

Can you remortgage in later life?

If you're retired or approaching retirement, the truth is that it isn't always easy to remortgage to raise capital and access additional funds. That said, remortgaging can still be an option.

There are no hard and fast rules about age limits. Instead, individual lenders will often have their own maximum age caps, so it's worth looking at different lenders.

But eligibility for remortgaging to raise capital in later life isn't just about age as lenders will also assess affordability. You will need to prove that the income from your pension would be more than enough to cover the repayments on the mortgage.

In order to make a decision, they'll look at the following:

• The amount you owe compared to the value of your home
• Your income – for example, from pension and savings
• Your monthly outgoings
• What the money is for
• Your credit history

Affordability is something you should also think carefully about before you decide to remortgage. It's important to make sure you have enough income to make your monthly repayments and afford the standard of living you want.

Speaking to a financial adviser will help you gain a better understanding of whether remortgaging is a suitable option for you to access some of the money tied up in your home.

Equity release

For homeowners aged 55 or over, equity release is another possible way to release cash tied up in your home. Basically, it allows you to unlock tax-free cash from the equity you have in your home – either as a lump sum or smaller amounts as and when you need them.

See how much cash you could unlock with SunLife's free Equity Release Calculator.

The money you unlock from your home can be used however you like, whether that's on a home renovation, to go on holiday, or to enjoy a more comfortable retirement.

If you still have a mortgage, the money you unlock must go to pay this off first.

If your home is eligible, the amount you can borrow will depend on the value of your home, state of health and age. But no matter how much cash you release, with most equity release plans you won't have to make any monthly repayments during your lifetime unless you sell your home or move into permanent care.

Instead, the loan plus compound interest is repaid when your home is sold, either when you pass away or move into permanent care.

Some providers do allow you to make one-off or regular repayments. Doing this can reduce the compound interest that builds up over time.

Could equity release work for you?

Even if you still have a mortgage on your property, you could still be eligible for equity release – it just means that the money you unlock will pay off your mortgage first. Any money left over after that is yours to spend as you wish.

Equity release is a big decision and it isn't right for everyone, so make sure you consider all other options. You should seek expert advice too, so you can be confident that you're making the right decision.

Remember – equity release will reduce the value of your estate and the amount you're able to leave as an inheritance when you die. It may affect your tax position and your current and future entitlement to state benefits.

Remortgaging vs equity release

Remortgaging to raise capital and taking out an equity release plan are both valid ways to access cash if you have equity in your home.

When weighing up remortgaging vs equity release, you might want to take the following factors into account:

• Your income – remortgaging to raise capital requires you to make monthly repayments, whereas an equity release plan does not. For this reason, your income level could be a factor in your decision.
• Your age – as well as affordability, lenders look at your age when you apply to remortgage. It isn't always easy to remortgage if you're approaching retirement, and lenders set maximum age caps.
• The term on your current mortgage – if you're nearing the end of a fixed-term mortgage, then remortgaging to raise capital may be a good option.
• Your inheritance plans – by paying off a mortgage in monthly instalments, your debt is slowly getting smaller, meaning there is more of your estate that can be inherited by your loved ones. With an equity release plan, if you are not making regular repayments, your amount owed keeps increasing every year. It could even reach (but not exceed) the value of your home. This could mean your loved ones may not inherit any proceeds from the sale of your home when you pass away.

Always get expert advice

If you're considering remortgaging to raise capital or equity release to access the money tied up in your home, remember that it's a big commitment – so you need to think about it carefully.

It's important to seek advice from an expert adviser to help you find out which option is best for you.

Related articles

• What is equity release?
• What is a home reversion plan?
• What is a drawdown lifetime mortgage?