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If you need money for home improvements or a business, then you could use your mortgage to generate the credit you need. Although using your mortgage to generate credit shouldnt be your first choice, if other lines of credit are closed to you then releasing equity from your home is a good way to generate a line of credit.

When should you release equity?

Releasing equity should definitely not be your first choice for generating credit. If you need money over a short period, then try using credit cards or save up the money. You could also get a personal loan. However, if you have a lot of equity paid for in your property and you need a large sum of money, then equity release could be helpful. Also, if other lines of funding are not open to you because of poor credit or other reasons, then equity release might be for you.

Remortgaging

One way to release equity in your property is to remortgage. You simply have to get a new mortgage, borrowing more than you currently owe on your property. This way you can make use of some of the capital you have already paid back into your home to consolidate debt or make home improvements.

Mortgage for life

Another way to release equity using your mortgage is to change your mortgage to a lifetime mortgage. This means that you take out a mortgage that will allow you to get a lump sum that you can spend as you choose. The interest rates on the loan will be high, and will be allowed to accumulate for your lifetime. When you die, the loan is repaid through the sale of the house. If the value of the loan and interest is more than the house is worth, the lender absorbs the loss. If the loan amount is less then the extra money is distributed to heirs according to your will.

Home reversion

Home reversion is another method of equity release. Home reversion means that you sell a proportion of your house to a company, who will give you a lump sum in return. When the house is eventually sold after death then the company receives the proportion of the house that they paid for, whether that is more or less than the loan that was given out.

Problems with equity release

Although equity release can free up much needed funds, there are a number of flaws with the concept. The major problem is the risk involved. You might be giving up a lot of home equity that has taken you years to build up for a relatively small loan amount. Equity release should be looked at as a last resort, but if you know what you are getting into then using your mortgage to generate credit can help you pay for items that you need or to consolidate high interest debts.

If you are looking for a home but you know that paying a mortgage will be a severe drain on your finances, then perhaps you should look at getting an interest only mortgage. If you are unsure about what an interest only mortgage is and how it can help you, then this article can provide you with some useful tips on getting an interest only mortgage.

What is an interest only mortgage?

An interest only mortgage is a mortgage where you only pay back the interest on the loan, and none of the capital debt is repaid directly. Once you get to the end of the mortgage term, you will pay back the capital payment in full.

How do you pay back the capital?

Although you dont pay the capital back directly through your monthly mortgage payments, you indirectly pay for the capital. You pay for the capital through an investment fund or other lump sum. So, instead of repaying your mortgage capital each month through mortgage payments, you may monthly payments into an investment fund. Apart from investment funds, the other main ways to pay off the capital are:

Savings
Switching to a repayment mortgage
Another lump sum such as inheritance

What is the advantage of this?

Although you are still making monthly payments into an investment fund, these payments are likely to be a lot lower than the monthly mortgage payments you would pay on a normal repayment mortgage. Your interest only payments will be low each month and so if you cannot afford to pay a lot each month at the moment, an interest only mortgage might be a good idea. Also, the idea is that the money you put into the investment fund will mature and leave you with enough money to pay off the capital at the end of the mortgage term as well as leaving you with some extra money.

Are there risks?

Of course, there are a number of potential risks of getting an interest only mortgage. The first problem is that if you are hoping to pay off the capital by switching to a repayment mortgage later on, you will be paying back a lot more money than if you started on a repayment mortgage. Although you may find it hard right now, getting a repayment mortgage to start with might be a better option. However, the main risk involved with interest only mortgages is that the investment fund you set up will not be enough to pay back the capital at the end of the mortgage term. If you cannot pay back the capital then you could end up losing your home at a time in your life that it will hit you hardest, such as at retirement age.

If you are going to take out an interest only mortgage, make sure that the funding method you use is safe, and that you have contingency plans if the fund is insufficient to pay back the capital. If you do this, then getting an interest only mortgage can be a great way of keeping your payments low whilst you improve your income.