Have you been postponing giving a makeover to your old bathrooms, making arrangements for a new pool, landscaping your backyard gardens, or fixing the paint job of your home, just because you are falling short of funds to finance the same?
A home renovation project isn’t a walk in the park! It takes time to plan, do your research, and invest a considerable sum of money, to add that much required ‘wow’ factor to your existing spaces. Interior work can convert your ordinary house into a posh retreat, provided you are lavish with your budgets. But where do you get this kind of budget from?
What is Home Equity?
Most homeowners purchase their abode by seeking a mortgage arrangement and paying up the EMIs, over a period of time. Ideally, until you haven’t paid the full amount of the loan, the asset isn’t yours fully. So, the term ‘home equity’ refers to the value of the home you own (as you have paid that much interest), without any debt attached to it.
Let’s take an example to explain this concept. If you have taken a loan of AED 4,90,000 and the remaining mortgage amount you still have to pay is AED 1,00,000, then AED 3,90,000 is your home equity.
Understanding Equity Release
Equity release is when you free up or release cash from your property by borrowing against its current market value. So, if you have taken a loan say 5 years ago and you have been paying ever since towards its repayment, the amount which is paid up is your home’s equity value. As time goes by, the market value of your home must have increased, which further adds to the equity in your property at your disposal. Homeowners can use this equity to get credit and thereby fund their home renovation work. There are numerous options available to raise a credit against home equity release, after computing your credit score by the lender. This type of borrowing turns out to be advantageous, as the rate of interest may be greatly reduced, and your home itself acts as collateral without the need to produce any other asset before the bank/financial institution.
Why opt for Equity Release for Home Improvement Work
As discussed earlier, home refurbishment can be a costly affair and having that kind of hefty cash flow is difficult. One can approach banks for opting a ‘personal loan’, but the interest rates would be high and running around to comply with the contract could get tiresome.
Instead, why not leverage the advantage of equity release and borrow money from the same lender who has funded your home purchase. By this arrangement, you will have to deal with only one lender and make only one repayment every month – which will get adjusted to your existing repayment cycle.
This sounds like a clear win-win situation for both parties. The lender has already entrusted credibility to you at the time of buying the home and is confident of your track record for repayment, and the homeowner can get a loan at a cheaper interest rate against ‘equity release’ and wholeheartedly sign-up for the renovation work. Banks favor equity release, as the loan is backed by an asset being ‘the home’ and therefore there is very little chance for default.
Other Ways to Release Equity for Home Improvement
If using equity release for home improvements isn’t what you are looking at, here are some other common ways that homeowners choose to fund their home improvement projects.
Remortgage
If you have equity to your advantage, means you have paid up most of the mortgage amount and only a partial amount is left to completely call the house ‘your own’. Some people consider opting for a remortgage arrangement, which means, switching to another lender and opting for a larger amount of mortgage value – which will be used for your home improvement work. However, you must carefully work out the value you will be paying in the long run and it should not turn out to be very expensive. Also take into account the increased rate of interest over time, as the monthly payment may get expensive with every passing year.
