What’s the difference between re-mortgage and equity release?
What is equity?
The most logical place to start is by defining what equity is. Equity is the difference between the market value of your house and any mortgage debt you have yet to pay. For example, you bought a house valued at £100,000 with a £10,000 deposit and a £90,000 mortgage. Your house is now worth £150,000 and you have £40,000 of mortgage left to pay. That means you have £110,00 of equity in your property. There are a couple of ways to increase your equity. We’ve mentioned one of them above – the value of your home has gone up since you bought it.
The other way is to pay down your mortgage quicker, so you have less mortgage debt and more equity in your home. If, over time, you’ve built up a lot of equity in your property, you can realise some of its value as cash by downsizing to a cheaper property, paying off any outstanding mortgage and pocketing the difference. However, if you have invested a lot of time, money and love into your home, you might not want to move. If that’s the case, re-mortgaging and equity release will both let you access some of the value you’ve built up in equity as a cash lump sum, to top-up your retirement fund, pay for that dream holiday, carry out home improvements or even put your children (or grandchildren) through university. The choice is yours in terms of what you do with the cash, but whatever the reason, either re-mortgaging or equity release can help.
What is re-mortgaging?
Re-mortgaging could mean one of two things. If you are looking to get a better mortgage deal than the one you are currently on, provided you are not tied into it you can shop around for a better interest rate or more favourable terms, which could help you save money in the long run. We’d recommend you review your mortgage with an expert broker regularly to make sure you are getting the best deal and you can find out more about this in our guide to re-mortgaging.
If, however, you are looking to release some of the equity built up in your home, you can also re-mortgage against it. In this instance, re-mortgaging simply means closing your current mortgage and taking out a new one, for a larger amount, secured against the equity you’ve built up. You’re essentially handing some of the equity back to the lender, in return for a cash lump sum, which you can use to supplement your retirement income.
Releasing equity by re-mortgage is a big decision to make, so if you are considering it, we recommend you take advice from an expert mortgage broker with experience in re-mortgaging to release equity.
What is Equity Release?
If you looking to increase your income in later life but are worried about taking on a bigger or longer mortgage, then equity release might be a better option for you. Equity release enables you to access the cash tied up in your home.
You will receive the cash, tax-free, as either as a lump sum or in smaller instalments, and will be able to spend it as you please, although you will have to pay any existing mortgage debt off first.
There are two types of equity release plan. A home reversion plan will allow you to sell all or part of your home to your equity release provider in return for a lump sum or regular payments. You will retain a percentage of ownership and still live in the property, rent-free until you die.
A lifetime mortgage, on the other hand, allows you to take out a mortgage secured against your home while retaining ownership. The amount you borrow, plus interest, is paid back when you die or move into long-term care. At the end of the plan, your property will be sold, and the proceeds split according to the proportions of ownership.