With the coronavirus pandemic forcing many of us to spend more time at home than usual, home improvements might be on the agenda. After all, a few improvements can make your property more suitable for your needs and increase its value. But what if you don’t have the funds to finance the work? Can you tap into the equity in your home to fund a home improvement project?
We have the answers.
What is equity?
Home equity is the difference between the current market value of your house and the amount that you still owe on it.
For example, if your home is currently worth £250,000 and your remaining mortgage balance is £150,000, you have an equity of £100,000. If you were to sell the home right now, you could earn £100,000 from it (minus estate agent fees and legal costs, of course).
Can I release equity to fund home improvement projects?
In a word, yes. You can access some of the equity locked up in your home without having to move. However, to qualify for equity release, you have to be at least 55 years old.
There are two main types of equity release.
1. Lifetime mortgage
This is the most popular equity release option. A lifetime mortgage allows you to take out a loan that is secured against your property in return for either a cash lump sum or a regular income.
You will still own 100% of your home. The home will be sold when you pass away or move into long-term care. The money will then be used to pay off the loan plus the accrued interest.
Lifetime mortgages typically require applicants to be at least 55 years old.
2. Home reversion
In this equity release product which is usually only available to people who are at least 60 (or 65 with some providers), you sell part or all of your home to a home reversion provider in return for a lump sum or regular payments. You will have the right to continue living in the property rent free until you pass away, but you have to maintain and insure the house.
At the end of the plan, your property will be sold. The sales proceeds will then be divided depending on the percentage you and the home reversion provider own.
How much can I get via equity release?
According to the Money Advice Service, the maximum amount you can borrow with a lifetime mortgage is usually up to 60% of the value of your home. With home reversion, you’ll normally get between 20% and 60% of the market value of your home (or the part you sell).
Is equity release the right option for funding my home improvement project?
Whether equity release is the right option to fund a home improvement project will depend on your personal circumstances. If you have no official beneficiaries or don’t mind reducing their inheritance if you do, then you can consider it.
On the other hand, if you want to preserve as much of your estate for your beneficiaries as possible, then it might be preferable to explore alternatives to equity release.
To decide whether equity release is the best option for you, consider talking to an independent financial adviser first.
How else can I fund home improvement projects?
- Remortgage. This could be worth considering, particularly if you are a young homeowner and you are making significant changes to your home that require a big sum.
- Home improvement loan. There are many lenders who offer these types of loans. Do your homework first to find the ones with the best interest rates and also consider how long you will need to repay the loan.
- Credit card. Using a credit card is a great option if you are only making minor improvements to your home. However, make sure that you can afford to make the minimum repayments every month. Missed or late payments can jeopardise your credit score. If possible, go for a credit card with a long 0% APR introductory period. This can allow you to pay off what you owe before you start being charged interest.
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