Home Equity Loan and Equity Release Are NOT the Same

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The Telegraph reported in early March (2017) that more than half of the homeowners participating in a survey indicated they are looking to make improvements to their homes rather than trying to move up the property ladder. Roughly 40% of respondents indicated a willingness to undertake home improvements in order to increase property values. It is this second group we want to address in explaining that, for home improvement purposes, a home equity loan and equity release are not the same things.

The difference between home equity loans and equity release programmes is significant even from a general standpoint. But when it comes to making home improvements, the differences between the two become more important. We recommend a home equity loan over equity release for a number of reasons. Before we get to those reasons, you need to know the differences between the two.

Equity Loans vs Equity Release

A home equity loan is the more common of the two options for making home improvements. It is a loan taken out against the equity in your property and repaid through monthly instalments as agreed to in the loan contract. If it helps you to understand it better, consider the home equity loan as a second mortgage. You pay back the loan right along with making your monthly mortgage payments.

Equity release is a scenario in which you essentially 'sell' the equity in your home to the lender in exchange for cash. You do not make monthly repayments in order to settle the debt. Instead, the loan need only be repaid by your estate when you die or enter long-term care. In both cases, your house would be sold to cover your borrowing.

Reasons the Home Equity Loan Is Better

We generally recommend a home equity loan for home improvements as the better option unless the borrower is a senior borrower already in retirement. We do so for the following reasons:

  • Retained Ownership – With a home equity loan, there is no selling a portion of your equity to the lender. You retain full ownership of both the property and the equity in it. As long as you make your payments, the lender has no means of exercising an interest in your property.
  • Passing on Your Home – Using a home equity loan to make improvements in no way compromises your ability to pass your home on to beneficiaries should you die before the loan is paid off. You can still pass your home on under an equity release scenario, but it is substantially more complicated.
  • Fluctuating Home Prices – When you exercise an equity release option, you are banking on the value of your property either staying the same or increasing. This is never guaranteed. If the value of your property falls, your estate could be a negative position when the property is finally sold.
  • Generating Greater Equity – Lastly, making improvements with a home equity loan actually increases your equity by increasing the property's value. With every mortgage and home equity loan payment made, your equity increases. The same does not apply to the equity release option. Once you take advantage of equity release, the growth in your equity is locked in to property prices only.

There may be some limited circumstances in which equity release would be the right choice for making home improvements. But by and large, a standard home equity loan is a better way to go. Borrowing with a home equity loan protects ownership of your property and helps increase your equity over time.

Sources:

Telegraph – http://www.telegraph.co.uk/financial-services/retirement-solutions/equity-release-service/home-improvement-loan-or-remortgage/

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