If you’ve been turning over the idea of releasing some of the value tied up in your home, you’re not alone. You’re probably wondering how it all works, what it costs, and whether it’s actually a good idea for someone in your position. It’s a well-established, everyday option for homeowners, and it’s a lot less complicated than it sounds once you know what you’re looking at.
Here’s what you need to know before you make any decisions.
Related: Buying a house with cash: Pros, cons and whether it saves you money
What does it mean to take equity out of your house?
Equity is the gap between what your home is worth and what you still owe on your mortgage. If your property is valued at £350,000 and you have £200,000 left to pay, you have £150,000 in equity. Taking equity out means borrowing against that value, rather than selling your home to access it, so you can free up cash while staying exactly where you are.
Reasons for doing this vary: a kitchen extension, helping a son or daughter with a deposit, clearing a chunk of debt at a lower rate than you’re currently paying, or topping up a pension in retirement. None of that changes the mechanics. You’re turning part of your home’s value into money you can spend, without moving house to do it.
How does taking equity out of your house work?
The route that suits you depends largely on your age, how much you want to release, and what you’re using it for.
Remortgaging to release equity
Remortgaging for more than you currently owe is the most common approach. Your lender values the property, calculates your available equity, and lets you borrow against part of it. That extra amount lands as a lump sum, and either your monthly repayments go up or your mortgage term stretches out to absorb the extra borrowing.
Most lenders cap lending at around 95% of your property’s value. Borrowing anywhere near that limit is worth thinking twice about, because even a small dip in house prices could tip you into negative equity, where you owe more than the place is worth. Most homeowners keep some distance from the ceiling for that reason, and a broker can help you land on a figure that doesn’t leave you exposed.
If you’re still tied into a fixed deal, check for early repayment charges first. They can run up to 5% of your outstanding balance, so waiting until your current deal ends often saves a meaningful amount.
A further advance
If you’re happy with your lender and would rather avoid the hassle of shopping around, a further advance lets you borrow more from them directly, on top of what you already owe. It’s usually faster to arrange than remortgaging elsewhere, though the rate on the new borrowing might not match your existing one, so it’s worth checking the numbers stack up before you commit.
A secured (second charge) loan
This sits alongside your existing mortgage rather than replacing it, which makes it worth considering if leaving your current deal would trigger an early repayment charge. The trade-off is two separate loans against the same property, running side by side.
Related: Why brokers are more important now than ever
Equity release, for homeowners aged 55 and over
For homeowners who are retired, or approaching retirement, equity release, usually a lifetime mortgage, lets you take money out of your home with no obligation to make monthly repayments. Interest builds up instead, and the whole amount is repaid when the property is eventually sold, typically after you move into long-term care or pass away.
If your lender belongs to the Equity Release Council, the plan comes with a “no negative equity” guarantee: you’ll never owe more than the property’s eventual sale price, and you keep the right to live there for life. Whoever you speak to, check if they’re authorised by the Financial Conduct Authority before you go any further.
Two alternatives are worth knowing about. A retirement interest-only mortgage (RIO) has you paying off the interest each month instead of letting it accumulate, and the rates tend to be lower than a standard lifetime mortgage, though you’ll need to prove you can afford those monthly payments. Home reversion works differently again: you sell part or all of your home to a provider, typically for 30-60% of its market value, in exchange for a lump sum or income, and you keep living there for as long as you want.
Related: Can you sell your house before you buy a new one?
How much equity can you take out?
That depends on your property’s current value, what’s left on your mortgage, your age if you’re looking at later-life products, and the lender’s own rules. Income and credit history matter too. Lenders care about what you can afford to repay, not just what’s sitting on paper as available equity. Get an up-to-date valuation from a local agent, it’s the number everything else gets built on.
What are the costs and risks?
None of this comes free. Depending on which route you take, expect some combination of:
- Arrangement or product fees for a new mortgage deal
- Valuation and legal costs
- Early repayment charges if you leave your current deal early
- Higher monthly repayments, or a longer mortgage term
- With equity release, interest that compounds year on year and eats into what’s left of your estate
- A possible knock to means-tested benefits like Pension Credit or Council Tax support, if a lump sum pushes your savings up
Your home backs every one of these arrangements, so if repayments are missed, it’s at risk. Borrow what you need, not what you’re offered.
Is taking equity out of your house right for you?
That depends on why you want the money, how much equity you’re sitting on, your age, and the rest of your financial picture. A loft conversion that adds real value to the property is a different calculation to borrowing for something that won’t. If equity release is on the table, weigh it against downsizing or a RIO mortgage first. Both can achieve the same goal for less.
Talk to a qualified, independent adviser before signing anything. It’s the only way to see the true cost of each option side by side, rather than taking the first one that’s put in front of you.
For guidance on how much equity might be available in your home, speak with your local Parkers branch about arranging an up-to-date valuation.
