Millions of people are sitting on substantial equity in their home thanks to continued property price rises.
It means families feeling the squeeze of consumer debts or keen to do home improvements could unlock some of the cash tied up in the value of their home.
For older homeowners too, who have paid off their mortgage but seen a drop in household income, equity release plans can be an attractive option.
Rising value: Millions of people are sitting on substantial equity in their home thanks to continued property price rises
Property values have ballooned by around 50 per cent in the past ten years and there is a combined £5.6trillion locked in private residential property.
But there are pros and cons in releasing equity. It is vital to ask the right questions and understand the risks.
REMORTGAGE TO UNLOCK CASH
Releasing equity should be straightforward if you have the income to cover the larger mortgage repayments.
But lenders are more cautious following a tightening of lending rules. So they will typically only allow such unlocking if the cash is for home improvements – which should increase the value of the property – consolidating debts or sometimes for a second property purchase.
For example, helping a child on to the property ladder. Many lenders will not agree to increase a mortgage loan to fund a holiday, car or business venture.
In general, lenders will want to keep the maximum mortgage loan to property value ratio at no more than 85 per cent.
OTHER WAYS TO MAKE MONEY FROM YOUR HOME
Rent out a room
You can let out a furnished room to a lodger. The Government allows you to earn up to £7,500 a year this way before you must pay tax on the income.
Let your home to tourists
There are numerous websites which enable homeowners to let out rooms or their whole property as a holiday let.
Properties close to popular destinations, coastal resorts and national parks are likely to command the highest rents.
It is advisable to inform your home insurer and there may be income tax to pay.
Let out your spare parking space – on your driveway or garage.
Depending on where you live (near a town centre, railway station, entertainment venue or football ground are all popular) you could charge up to £25 per day or £200 per month through one of the many online parking websites.
They include parkonmydrive, JustPark and yourparkingspace. You could also let your garage or loft as storage space via a website such as Storemates.
If you think your home may have silver screen appeal, or even the makings of a set for an advert, then there is significant cash to be made.
Agencies will pay up to £2,500 per day for the hire of your home. Again you will have to declare any income to the taxman and it may be wise to inform your insurer.
Lend your stuff
If you have got a bike, power tool, lawn mower or jet washer collecting dust in the shed, they could be working for you.
Websites such as RentNotBuy and RentMyItems enable you to rent out individual items by the day or week.
Ishaan Malhi, founder of online mortgage broker Trussle, says borrowers should check there are no penalty fees.
He adds: ‘If you are within an existing fixed or tracker rate mortgage deal there are likely to be early repayment charges if you are remortgaging and increasing your loan to release equity. These penalties can be high.’
It is preferable to wait until your existing deal has ended to avoid penalties or you could discuss getting a further advance with your lender.
Any extra borrowing will be subject to usual affordability criteria and you may have to pay your lender’s standard variable rate which can be costly.
But this may be preferable if you want to leave your existing first mortgage in place. Right now there are record low mortgage rates.
Know the terms: Extending the term of your mortgage can reduce monthly repayments if you are borrowing more
Switching lender to remortgage and release funds could prove advantageous. Peter Gettins, of mortgage broker London and Country in Bath, Somerset, says: ‘Ask what rate your existing lender can offer but always shop around too. If you are on a standard variable rate, switching the whole loan to a new deal with a different lender could leave you better off even with additional borrowing.’
Extending the term of your mortgage can reduce monthly repayments if you are borrowing more.
But you are increasing the length of time you will be paying interest on the loan.
Many lenders will extend your mortgage term to your state pension age. Some will let it run longer but may ask to see private pension projections.
EQUITY RELEASE PLANS
Unlocking funds from your home is becoming increasingly popular for older homeowners.
Alex Edmans, equity release specialist at Saga Money, says: ‘Many retired households are asset-rich but cash-poor.
Equity release can mean continuing to live a certain lifestyle.’ But she warns equity release is not an option to be taken lightly.
Those considering it should discuss it with family and consider alternatives. Downsizing may be a better option and the only way to ensure you get your home’s true market value.
There are two types of equity release plan – home reversion and lifetime mortgage. Expert independent advice is essential as there may be tax implications and it could affect eligibility for benefits.
With a reversion you sell part or all of your home to the equity release firm in return for a lump sum or an income for life.
Expect to get 30 to 60 per cent of the market value of your home. Reversions tend to suit older homeowners who will get better value due to lower life expectancy.
Over-65s are eligible. A lifetime mortgage, available to over-55s, is a loan secured against your home.
The borrower ceases monthly repayments. Instead, interest is rolled up. The interest and loan are repaid when the homeowner dies or goes into care and the property is sold.
So called drawdown plans are available so you can borrow in stages, reducing the overall interest paid back.
Dean Mirfin, of independent adviser Key Retirement Solutions, says: ‘Drawdown gives peace of mind that funds can be accessed later if needed.’
Certain plans allow you to ringfence some of the home’s value as an inheritance for your children. There is a ‘no negative equity’ guarantee – so you will not pay back more than the value of the property when it is sold.
To request a free guide written by The Mail on Sunday’s Jeff Prestridge, call 0800 531 6012 or go to keyretirement.co. uk/campaigns/mos.