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Owning a property is significant to anyone, in any walk of life – and if you find yourself in this position, you may be wondering: “How can I release money from my house?”. This is a particularly important question in times of financial hardship.
You may also wish to release money from your house for purposes such as a home renovation, paying off debt, going on a holiday, or even putting it towards your child’s education.
There are pros and cons to doing this, so let’s take a look at the options available to you.
There are three options for most homeowners when it comes to releasing cash from your home:
- Equity release
- A secured loan
There is no best way to release cash from your property but there will always be one option that is better suited to your circumstances. Your age, LTV (loan to value), affordability, and how quickly you need the funds will determine the best option.
Anyone aged 55 and older may find that they struggle to meet the affordability criteria for a remortgage, making equity release a potential option.
A lifetime mortgage is a reasonable option for many since it allows you to borrow money with the property as security. Lifetime mortgages also do not need to be paid back until the person who has taken this option passes away or enters long-term care. The property will then be sold to pay the debt.
Equity is the percentage of the property that you own outright. Most people know it as the difference between the remaining amount of the mortgage compared to the market value of the property.
A secured loan is a good option for anyone who wants to borrow at a higher loan to value rate than their lender will agree.
The reason for taking out a secured loan can be tricky. Resolving debt with the funds may not be an agreeable reason for some, and anyone with an unfavourable credit history may wish to look at a secured lender, as they are likely to be kinder on their application than a mortgage lender.
The higher fees and interest rates involved make secured loans less popular than equity releases. When taking out a secured loan, it is likely to be known as a second charge. A second charge means the lender of the loan will have to wait for the mortgage lender to clear their debt first if the property is repossessed.
If you are looking to release money from your house, remortgaging is another option. It usually comes with the lowest interest rates when releasing funds from your home.
You may wish to use your current lender and choose an additional product if there is an early repayment charge involved. Compare the overall costs of additional borrowing to that of a secured loan to make sure you are going with the best option financially.
First things first, your lender will look at both your credit rating and your finances to identify the best offer possible that they can make. There are a few factors that determine how much you can release, including your age and the amount of equity in the property.
Remortgaging can be difficult for those 55 and over because it is assumed that their income will decrease. New mortgages can typically be given up to the age of 65 but those over 50 may find it tricky to remortgage.
A downside of equity release is that interest costs increase and the lender will charge interest on what you have borrowed, meaning that it keeps stacking up month on month. These costs can add up to thousands over the years.
There could be an early repayment charge when remortgaging to release equity, especially if you are within a fixed term period. The fee involved is usually a percentage of the remaining loan as well as an exit fee – and even fees for arranging the new mortgage.
A lower interest rate may make it worthwhile, and if there is plenty of equity in the property, the cost of remortgaging may seem more appealing.
The process of remortgaging and releasing equity tends to take between three to eight weeks. It is a good idea to plan and allow plenty of time for the application to be considered in advance.
Every time you remortgage to release equity, you increase the size of your loan, and usually your repayments. The repayments will mean you end up paying more back than from your original loan, plus it will usually take longer to repay the loan in full.
Your loan to value will increase if you are borrowing more than the increase in equity amounts to. The big risk is getting into negative equity, which can happen if house prices fall, so be wary, or your loan will be bigger than the house’s value.
There is a further downside to this: it can be difficult to sell a home and almost impossible to remortgage, not to mention the potential for failed payments impacting your credit score.
Yes, there are alternatives to remortgaging available to you – but these are seen as less desirable for different reasons. Some of the alternatives to remortgaging to release money from your house include a personal loan which could come with high-interest rates.
Another alternative to remortgaging is using a credit card. A money transfer credit card may be tempting, but it is always important to do the research first to see if you can truly afford it.
A joint mortgage is another option where you can add a child onto the mortgage but again, there is another set of criteria, affordability options and credit checks involved.
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Click this link to learn more about negative equity.