Three ways to release value from your home

08 January 2021

5 min read

Hannah Smith
Hannah Smith

Personal Finance Journalist

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If you are a home owner and you’d like to be able to access some of the cash in your home now, there are various routes to do it. Here’s a quick look at three of them.

With property prices soaring* many homeowners are wondering what’s the best way to get their hands on the growing equity in their homes. If you’re a homeowner, here are the main pros and cons and things to think about before you decide.

Release money from your home by downsizing

Downsizing means moving to a smaller home to free up some of the equity you may have built up in your existing property. It could also reduce your monthly outgoings as smaller houses will usually have lower running costs.

There are other practical reasons to make such a move:

  • Sometimes, people want to live in a more accessible property such as a bungalow as they age
  • To move closer to family
  • After the loss of a spouse
  • They might want a new-build house that’s well insulated and easier to maintain, rather than a rambling country pile with a large garden to look after.

While moving from a beloved family home can come with an emotional toll, the financial and practical benefits could make it worthwhile. On the downside, you may have to pay a lot in legal and estate agent fees and moving costs, plus there’s the stress of packing and moving.

But what about the tax implications to downsizing?

If you move to a lower value property that you plan to leave to a beneficiary when you die, you may still qualify for an inheritance tax allowance called the residence nil rate band under a ‘downsizing addition’.

This is a complex area though, so take professional advice.

Pros of downsizing:

  • You have a smaller mortgage to repay. Or, you could become mortgage-free
  • Lower running costs
  • More accessible home
  • Easier maintenance.

Cons:

  • Upfront costs like legal, survey, and estates agent fees.
  • Stress of a move
  • Tax implications.

Remortgage your home to release some of its value

Rather than selling up, you could remortgage your existing home, meaning you transfer the outstanding mortgage debt from one lender to another. As you’ve paid down your mortgage over the years, and your home has (hopefully) increased in value, you should have built up more equity. This means you might be able to remortgage at a lower loan-to-value (the amount you’re borrowing as a percentage of the value of your home), which should reduce your monthly mortgage payments.

Alternatively, you could borrow more than you currently owe. This would give you a chunk of money you can use for whatever you want, whether that’s repaying debts, home improvements, or gifts to family. Generally, the lower the loan-to-value, the better the deals on offer.

The main disadvantage of remortgaging is that you are adding years on to your borrowing, and there’s always a risk that your house could fall in value to become worth less than the amount you owe, leaving you in negative equity.

If you’re thinking of remortaging, check whether there are early repayment penalties on your existing deal. Depending on your age, you might struggle to get a standard remortgage deal, or it might be a much shorter term than you were expecting, which means repayments could be higher each month. For many lenders though, income affordability will be a more important consideration than age. Some lenders offer specialist over-50s mortgages which could be worth considering.

Also think about whether using savings or taking out an unsecured loan might be a better option than extending your mortgage term.

Pros of remortgaging:

  • It could cut your monthly repayments
  • Free up a lump sum
  • A cheaper mortgage deal could save you a lot of interest long term.

Cons of remortgaging:

  • Adds years to your mortgage term
  • Extra borrowing takes a long time to repay and costs a lot in interest.

Equity release

Equity release could be an option to access some of the equity in your home to enjoy today, especially if you don’t have anyone to whom you’d like to leave your estate when you die.

You can take out a lifetime mortgage which you can choose to repay some or all of the interest each month. Or, if you prefer, you could roll up the interest so it compounds. Either way, the remaining loan amount and interest is only repayable when you die or go in to long term care and your home is sold.

Alternatively, you can go for a home reversion plan, where you sell all or part of your home at a discount to market rate but remain living in it until you die or move in to care.

The money from the part you’ve sold can be paid to you as a lump sum or regular income. Bear in mind there are tax implications to equity release, and it can affect your entitlement to state benefits.

Equity release is not for everyone, and it’s a big decision, so you have to take financial advice if it’s something you’re considering.

Read more in our guide on the two types of equity release here.

Pros of equity release

  • You can stay in your home
  • Get a lump sum or regular income.

Cons

  • Can be expensive
  • Reduces value of your estate
  • Can affect your entitlement to benefits
  • Tax implications
  • You’ll need to pay for financial advice.

There’s more than one way to unlock some of the value in your home, and you don’t necessarily have to move house to do it. To find out more, speak to an independent financial adviser to get impartial advice on the options available to you.

*Nationwide House Price Index, November 2020 

Biography

Hannah Smith is a freelance financial journalist with a background in the trade press. She writes about personal finance, asset management and business for titles including Money Observer, Shares, FE Trustnet and MoneyWeek.