Release of Equity
What Is Releasing Equity?
What Is Releasing Equity?
This an option only available to homeowners. Releasing equity in your property, whether via a remortgage or secured loan, to pay off debt involves you replacing, or extending, your existing mortgage, or taking out a loan against your property in order to borrow money. ‘Equity Release’ relates to a credit product usually applicable to retired homeowners; specialist companies secure credit against the equity in your property with no monthly repayments – this is instead repaid when you die or go into long-term care and from the proceeds the property is sold. When releasing money from your property to clear your debts, it will be your responsibility to send the funds to your various creditors.
Each lender has their own criteria. You must be a homeowner and have enough equity in your property to secure credit against, as well as (for remortgages and secured loans) the affordability to meet repayments.
Advantages and Benefits
- Equity released from your home can be used to pay off your unsecured debts.
- Remortgage terms may be more suitable to your current situation. Monthly remortgage payments will usually be much less than the combination of your existing debt and mortgage payments, taking away any difficulties with managing multiple separate debt payments.
- Remortgaging may be at a lower interest rate than you have with your current mortgage.
- Combining several covering individual debts and your mortgage into one monthly payment may be easier for you to manage.
- Interest rates for secured loans are typically lower than those applied to unsecured credit.
Disadvantages and Potential Consequences
- When remortgaging, you may incur an early settlement charge (‘Early Redemption Charge’) as you will be paying off your current mortgage before the end of its term.
- Your home is at risk if you do not keep up with your mortgage payments. You may end up paying more over time by moving unsecured debt amounts into your mortgage. Lower interest rates spread over a longer period of time may make monthly payments lower and easier to manage but can result in you paying back much more than you would by keeping debts unsecured over a shorter term.
- You may not have enough equity in your property to pay off all your debts.
- Remortgaging to pay off debt could affect you remortgaging/moving to a new house in future. Mortgage rates may rise in future and extending your mortgage now could lead to you being offered higher rates when re mortgaging/buying in future.
- Failure to maintain payments may affect your credit rating and score