How to release equity in your home

Equity release won’t be right for everyone, but there is another option to consider – a home equity line of credit (HELOC). HELOCs are commonly used by homeowners in the US, Canada and Australia, but Selina Advance is the first provider to offer HELOCs to those in the UK.

If you’ve paid off a significant amount of your mortgage or the value of your home has increased over the years, you might have built up a decent amount of equity in your property. In which  case, you could be considering releasing some of that equity to access some extra cash. 

There are many reasons for releasing equity from your home, but some of the most popular ones could include: 

•Making home improvements 

•Paying for a holiday 

•Buying a new car 

•Helping family members 

•Living more comfortably 

•Paying off existing debts 

How can you release equity from your home?

There are two main equity release schemes and they both work in different ways. 

One of the most popular equity release schemes is a lifetime mortgage, but you’ll need to be aged 55 or over to qualify. 

With a lifetime mortgage, the applicant is able to take out a loan secured on his home which does not need to be repaid until they die or go into long-term care. It frees up some of the  wealth they have tied up in your home while they can continue to live there. 

A lifetime mortgage enables you to turn some of the equity in your home into tax-free cash by either taking it as a lump sum, or in smaller, regular amounts with a drawdown facility. If you  choose a drawdown product, you’ll only pay interest on the amount you’ve taken. 

These funds don’t need to be repaid until you die or move into long-term care. In some cases, the interest will roll up (compound), which means you won’t need to pay anything back until  your home is sold. However, this can be expensive so many plans now allow you to make some repayments to reduce the overall cost. 

Another option is a home reversion plan. In this case, you’ll usually need to be aged 65 or above to qualify and you agree to sell all or a portion of your home at less than its market value in  exchange for a tax-free cash lump sum, regular payments or both. You can remain living in your home until you pass away or move into long-term care and your plan provider gets its share  of the proceeds once your home is sold. 

If you don’t qualify for either of the above schemes, you could consider remortgaging to release some equity. 

To do this, you’ll need to add the amount you want to unlock from your home’s value (considering any outstanding mortgage balance on the property) to your new mortgage. Just be aware  that if remortgaging means you need to get out of your existing mortgage deal early, the fees for doing so can be high. And, because you’ll be borrowing more, your monthly mortgage  repayments will likely be higher.

What are the downsides of equity release? 

Although there are many benefits to using an equity release scheme, there also may be a lot of drawbacks, we’ve outlined some below: 

Age restrictions: If you’re a younger borrower, a lifetime mortgage or home reversion plan simply won’t be available to you. 

You may have to borrow a lump sum: If you release equity as a lump sum, you’ll need to have an accurate idea of how much cash you require. This can prove problematic if your estimate is  too low and you need to borrow more. Once you’ve used an equity release plan, no other loans can be taken out using your home as security, although some providers may allow you to take  out more equity from your home (if there is any remaining) at a later date. 

Your benefits could be affected: Using an equity release scheme could affect your eligibility for means-tested benefits such as pension credit and universal credit, whether now or in the  future. 

Your family won’t inherit your home’s entire value when you die: The loan will be repaid to the provider and any leftover money afterwards will go to your estate to leave as an  inheritance. 

High exit fees: Should you wish to pay off your loan early, you’ll usually pay a hefty early repayment penalty. 

High overall expense: If you choose to roll up interest on a lifetime mortgage, the amount owed can grow rapidly over the years. To keep a lid on escalating costs, look for a lifetime  mortgage provided by a member of the Equity Release Council as they offer a ‘no negative equity’ guarantee. This means you will never owe more than your home is worth when it is sold. 

You won’t receive your home’s full market value: If you use a home reversion plan, you’ll usually only get between 20% and 60% of your home’s market value depending on your age and  state of health. 

Is there an alternative to equity release? 

Equity release may not be right for everyone, but there is another option to consider – a home equity line of credit (HELOC). HELOCs are commonly used by homeowners in the US, Canada  and Australia, but Selina Advance is the first provider to offer HELOCs to those in the UK.  

A HELOC works by letting you borrow against your home. You then receive the funds as a line of credit that you can draw on as and when required, up to your agreed limit. This means if, for  example, your home improvements cost more than expected, you can draw additional funds, provided this is within your credit limit. What’s more, no interest is paid on the HELOC funds  you leave untouched. 

You’ll be given a flexible period, during which you can draw on your funds, repay them and then redraw. The loan, plus interest must then be repaid during the repayment period, but there  are no early repayment charges if you want to pay back more than your usual monthly amount at any point.  

Overall, using a HELOC could potentially offer more flexibility compared to traditional equity release schemes and you can choose to repay your loan in as little as five years or over a much  longer period of 30 years. It won’t affect your entitlement to means-tested benefits and you do not need to be approaching retirement to qualify. This means your whole family can make use of the cash  injection when you’re younger, whether you’re using it to extend your house or buy a bigger car. 

Just remember that whichever option you’re considering, you’ll need to have sufficient equity in your home to qualify and you’ll need to have a good credit rating to secure the best interest rates. You should also seek financial advice before proceeding – this is a requirement of the Financial Conduct Authority (FCA) if you’re considering an equity release scheme.

Get a quoteLearn more

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments.