While the idea of releasing equity in your property with interest rates so low makes perfect sense in the right situation, many people are still concerned about taking on additional debt.
When looking to fund assets or services using equity release, the first thing you need to do is compare the interest rate on personal loans and the interest rate on mortgages.
There are a number of options which include remortgaging your property, taking out a second charge mortgage, downsizing or perhaps a home for life plan which is more popular amongst older people.
So, what drives the majority of people to consider equity release as a means of raising funds from their property?
House Price Rises
As you will see from the table below, there has been a significant increase in average UK house prices (as measured by the Nationwide House Price Index) over the last ten years: –
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If we go back to the start of the Nationwide House Price Index and look at prices decade by decade, it is not difficult to see how those who acquired the property in the 1980s and 1990s could now have a huge amount of equity tied up in their homes.
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Aside from the fact that the average property price has more than quadrupled since 1991, we also need to remember that homeowners would also have been paying down their mortgage over that period.
So they have the double whammy of their mortgage reducing and the value of their property going up.
Keep One Eye on Interest Charges
Whether you are looking to remortgage your property, take out a second charge, use as collateral or utilise a facility which will roll up the loan interest until your property is sold, there are various issues to consider.
When you remortgage a property, you are effectively taking out an additional loan upon which there will be interest paid, albeit minimal at the moment, going forward.
If we take a scenario where a property is remortgaged to release £50,000 in equity, to be put to one side as a lump sum safety net, what are the potential consequences?
Well, let’s say for example £10,000 of this lump sum payment is required to supplement living expenses each year. Each individual/couple will have in theory five years of supplementary funds to fall back on.
However, they will be paying interest on the loan over an extended period when after year one there will still be £40,000 in their bank account. In theory, assuming it is cost-effective from an administration point of view, it may be worth entering into an equity drawdown facility where you are able to release £10,000 from your home equity each year.
This ensures that you are only paying interest on borrowings as and when you use them.
Equity Release Providing Financial Assistance for Your Family
Whether looking at your children, grandchildren or extended family, many people of all different ages will look to assist financially where possible.
This may be something as simple as buying their first car, first holiday abroad or perhaps assistance with their career and education.
Even though inheritance tax and other tax considerations are not necessarily high on the agenda for the majority of us, they do need to be addressed at some point.
While each individual scenario will be different, it may be more beneficial to release equity in your property to help your family financially as opposed to leaving the property in your will.
When looking at taxes, we have no idea how, for example, inheritance tax will evolve in the years to come. As governments continue to claw back as much money as possible, it is not inconceivable to suggest inheritance tax will be much higher in years to come.
As a consequence, it may be an idea to release equity in the short-term, thereby not only alleviating your family’s financial challenges but potentially reducing tax liabilities going forward.
The regulations regarding inheritance tax and gifting to family members do tend to change on a regular basis, and it is advisable to take financial advice before going down this path.
However, from a purely practical point of view, it is worth considering releasing some equity if only to alleviate the financial distress of your family in the short-term.
Equity Release Access to a Lump Sum
While the vast majority of those with significant equity in their home is likely to have acquired them back in the 1980s and 1990s, this is not always the case. As a consequence, the idea that access to lump-sum funds is for the older generation is not always true.
When you consider it is perfectly feasible to have in excess of £100,000 equity tied up in your property this is a significant lump sum to fund your lifestyle or crystallise for your “rainy day” fund.
As we touched on above, with UK base rates currently standing at 0.1% and mortgage rates near record lows, for those seeking access to a lump sum this may be an opportune moment.
There are numerous reasons why you may want access to a lump-sum although if it is simply for a “rainy day” fund, might it be better to wait until those funds are required therefore avoiding superfluous interest charges?
Equity Release Assisting With School Fees
In recent years we have seen significant growth in demand for private education which incurs school fees. Parents, grandparents and great grandparents often have a natural desire to give their family.
The best start in life where possible. When you consider that private school fees will quite literally be counted in the hundreds of thousands of pounds over the full duration of a child’s education, this is a huge investment.
While optional, there is also the potential cost of university education which can again command significant fees. Therefore it is not difficult to see why some individuals/couples in a situation where they have significant equity in their property may like to assist.
Equity Release Funding Healthcare
Whether looking at private healthcare in the short-term or the ever-growing cost of care in later life, there is a lot to consider. To many people, it is inconceivable that we won’t see a huge shakeup in the NHS in the medium to long-term.
This may see governments in the future, encouraging those who can afford their own healthcare to pursue this option – or contribute directly to public healthcare costs. We have also seen governments edging towards the forcible liquidation of property assets in the event that property owners require long-term state care.
Therefore, when planning ahead for the future, it may be sensible to retain a degree of control and have your own future in your own hands.
There are numerous long-term healthcare plans which will incorporate a degree of home equity, and it is certainly worth looking into if your circumstances are changing.
Again, it is very important to take advice on these matters to ensure that you are entering into an agreement which is suitable for your individual scenario.
Equity Release to Pay Off Debts
We often see individuals and couples struggling to cover their short-term financial liabilities while retaining significant equity in their property.
When you consider the current level of UK base rates, and as a consequence relatively low mortgage rates, against what can be huge overdraft, personal loan and other debt interest rates, it makes sense to consider equity release.
The majority of people will sit down on an annual basis and review their finances to see exactly where they stand today, in the short, medium and long term. Does it make sense to retain equity in your property, which is earning no income, while continuing with monthly repayments on relatively high-interest debts?
For those who are struggling with debt issues, there can be issues when looking to remortgage or take out second charge loans on their property.
In the short-term, it may well be worth considering downsizing your property and thereby releasing equity at the same time. There are still factors such as the loan to value ratio, income and affordability to consider but if your debts are starting to mount up and you are starting to miss payments, it may be a sensible option.
In the event that you don’t utilise assets to hand, such as equity in your property, you may have your hand forced by the authorities if bankruptcy or some other kind of debt management option is pursued further down the line.
There is absolutely no point in accruing equity in your property if you are struggling to cover your short to medium-term financial liabilities.
Equity Release Home Reversion Plan
As we touched on above, the UK housing price boom, which began in the 1980s has seen many older individuals and couples left with huge amounts of equity in their property.
As they approach retirement, often on an asset rich but cash poor basis, many are now turning towards home reversion plans. While there has been some controversy with regard to these plans in the past, regulations have tightened, and there is now more transparency. So what is a home reversion plan?
Let’s assume that you have a property worth £200,000 on which there is no mortgage. In effect you have equity of £200,000 in the property. However, you are looking to raise around £40,000 for general living expenses and to start ticking items off your bucket list.
There are companies who will take a stake in your property which will be repaid when you die, and your property is sold. The controversy surrounds the way in which this stake is acquired and the valuation.
For example, a 40% share in a £200,000 property would, in theory, cost £80,000 at market value. A home reversion plan may involve the provider taking a 40% stake in your property for just £40,000.
So effectively from day one, they have doubled their money, but they won’t be able to access their funds until the house is eventually sold. There is also a discounted interest rate calculation to take into account and the fact the property owners will likely be allowed to live rent-free for the remainder of their life.
There’s also one more factor to consider, a potential increase in the value of the property in years to come. As the home reversion plan provider has acquired a stake in an asset, they will also benefit from an increase in the property value going forward.
If the house was to double in value before being sold then their 40% stake in a £400,000 property would be worth £160,000 – this from an initial investment of £40,000.
Equity Release for a Once in a Lifetime Holiday
There comes a time in everybody’s life when you feel you have worked hard enough to enjoy that dream holiday of a lifetime. Whether you are trekking through Asia, sampling the delights of Australasia, relaxing in Jamaica or mountaineering with the Sherpas, we all have dreams.
The Internet has opened up a whole new world for both young and old allowing them to research dream destinations and even arrange them online. So, if you have significant equity in your property, what is stopping you?
Many people like to plan into their later years, incorporating new experiences and far-flung ventures.
This gives them a purpose, a goal and ultimately, a new lease of life when they retire. Who can blame them?
Equity Release Supplementing Business Cash Flow
Since the turn-of-the-century, we have seen the US mortgage crisis in 2008 and the coronavirus pandemic of 2020. These two events have had a huge impact on not only personal lives but also business lives.
The UK government has recently ploughed billions upon billions of pounds into supporting businesses, but many are still struggling with cash flow problems. In theory, these are the perfect scenarios for those who are asset rich but cash poor, to find ways and means of supporting their business interests.
In theory, it makes perfect sense, utilising the equity in a property which is currently creating no income and switching this into cash to help alleviate business cash flow problems.
While mortgage providers will still need to incorporate an acceptable LTV ratio into their calculations, where there is significant equity and a surplus after the fundraising, this can be done relatively quickly.
In many cases, this could be the difference between a prosperous business and one which is forced to close its doors.
Equity Release for Investment Funds
While many homeowners tend to take a more conservative approach to their assets and investments, some individuals and couples are a little more proactive.
For those actively looking to build up their assets, improve their income and diversify their portfolios, there may well be opportunities to secure relatively low-interest capital by releasing equity.
If for example, you were offered an investment opportunity with a return of 10% per annum, or potential huge capital appreciation, it may be sensible to look at crystallising your property equity. If you took out a mortgage in the current environment, it may be possible to secure an interest rate of less than 4%.
So, in theory, the investment opportunity becomes self-financing because it is able to cover mortgage repayments and still leave additional surplus income.
While this is a relatively simplistic view of an investment opportunity, and the option to use property equity as capital, it gives you an idea of how you can “work” non-income-producing assets a little harder.
Equity Release for a Business Idea
Even the best business ideas can sometimes struggle to secure funding. It may be a no-brainer, it may be a world-beater, but sometimes the timing may be wrong, or others are unable to see your vision.
There is always a risk with any new business idea, there are always challenges, and the risk-reward ratio in the early days can sometimes be a bit too rich for lenders.
However, over the years, we have seen many successful business people remortgaging their property, releasing equity and investing their life savings into their new venture.
Television programmes such as Dragon’s Den often highlight individuals who have taken a calculated gamble with their life savings (for many their property equity).
While the majority will struggle, there are some business entrepreneurs who reach for the stars and manage to grab one.
These fundraisings are not high-risk projects by mortgage lenders because, as mentioned above, they will always incorporate headroom in the form of an appropriate LTV ratio and affordability calculation.
This is effectively the mortgage lenders insurance policy, the difference between borrowings and the value of the property.
Equity Release for Additional Property Investments
There can be numerous attractions to liquidating property equity to acquire new real estate. This may be a weekend retreat; perhaps you are acquiring property for your children at university or even an overseas investment.
While from the outside looking in, this may seem like some kind of vanity project we mustn’t forget it is an investment in an additional property. Yes, there will be costs and charges going forward, but if managed correctly, there is the opportunity to create an additional income stream and/or long-term capital appreciation.
When you consider that unrealised equity in a property is creating no immediate income, it is not difficult to see why many people do look towards additional property investments.
Equity Release for Buy to Let Investment
The UK buy to let industry has been extremely active over the last 30 years or so. Since the 1980s and the start of the UK housing boom, house prices have increased dramatically and in some areas moved out of the reach of first-time buyers.
Therefore, we have seen a significant increase in the number of people in private rental accommodation and hence growing demand for buy to let investments.
While the market has been curtailed somewhat in recent times, due to additional tax and regulatory liabilities introduced by the government, there are still long-term attractions.
You will tend to find that buy to let mortgage providers are not as “generous” with their LTV ratios compared to those acquiring a home to live in.
As a consequence, the more capital you can put down on a buy to let property, the less you will have to borrow. So effectively, your property equity is creating income from day one, which was not the case when unrealised capital in your home.
This is a perfect example of how to “sweat your assets” to create a long-term income stream with potential for capital appreciation.
Equity Release for a New Car
Whether looking at a luxury vehicle or perhaps an environmentally friendly electric car, more and more people are now looking to liquidate an element of their property equity to fund such acquisitions.
The more common funding options available for new vehicles include dealership car loans, personal loans and various forms of hire purchase. All of these options charge a significant interest rate, especially compared to your property equity capital which is “free”.
It is also worth noting that with the exception of a personal loan; very often the vehicle is not legally yours until you have repaid the loan in full.
Whether a necessity or simply a “present” for yourself, you can’t beat a brand-new car!
Equity Release for Home Improvement
Interestingly, home improvements are extremely popular during both boom times and recessions. It seems that homeowners are constantly looking to adapt and expand their properties.
As a consequence, there is an extremely active home improvement funding market which will allow homeowners to release part of their property equity to cover the cost of home improvements.
While for many homeowners, this is an opportunity to create their “dream home” for others, it can be a means of increasing the value of their home above and beyond the cost of the improvements.
Imagine the scenario; you have a property worth £100,000, of which £50,000 is equity. You’re looking at home improvements which will cost in the region of £20,000. There is an opportunity to remortgage the property on a lower interest rate and an LTV ratio of 70%.
This pays off the £50,000 remaining mortgage and releases equity of £20,000 to fund home improvements.
Now, these home improvements increase the value of your property to £150,000, thereby creating an immediate theoretical return of £30,000. But there’s more!
Now imagine you were able to secure a 70% mortgage on the enhanced property value of £150,000. This would equate to £105,000 of which £70,000 would be used to pay off the earlier mortgage refinancing.
This then leaves an additional £35,000 in equity while still maintaining acceptable headroom between the new mortgage liability and value of the property.
So a £20,000 equity release has funded a situation where the value of the property has increased by 50%, and you have released even more capital!
There are numerous reasons why you may look towards equity release as a means of raising capital. Even though you might have significant equity in your property, the affordability factor and LTV ratios will still be considered.
It is very important to consider equity release as part of your short, medium and long-term financial planning.
However, for those who find themselves asset rich but cash poor in their later years, there is now an opportunity to raise funds for a variety of different reasons.
How Can Equity Tree Help?
Here at Equity Tree, we have partnered with some of the UK’s leading Equity Release broker companies.
They have already helped thousands of people release equity already, and they can do the same for you.
Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.
If you would like to speak to one of these equity release companies, click on the below and answer the questions.