How to use ‘equity release’ to your advantage

Wafa and Saif count themselves lucky that they invested in a home in 2020 when the prices were lower. Their home has since doubled in value, they have paid off most of the property finance, and have now decided to invest in another property. While they were exploring finance options for another property, they realized they could, in fact, refinance the house they own, using a mechanism called ‘equity release finance’. Recent surveys show that property finance customers account for 43% of all ready-to-move property transactions in some areas of the UAE.

How it works: With most of the property finance paid off, Wafa and Saif now market value of the equity in their house has appreciated, the remaining value of equity still being held by the bank for the unpaid part of the property finance. With other aspects in place, they can use the ‘owned’ equity to take another finance, which can be used to buy another property.

1. Rate advantage:

An equity release finance usually has a lower profit rate compared to other kinds of finance such as personal finance.
Assess your purpose for taking on debt before you sign up for it. Are you going to get clear returns from that investment?

2. Larger liquidity:

An equity release is tied to your existing property, so your eligibility for finance is calculated on the basis of an existing asset. This money can be used to make a down payment on a second property.
Assess your repayment capacity for the new finance based on UAE Central Bank’s recommendations on ratio of finance to total value.

3. Portfolio update:

An equity release is useful if you want to retain your existing asset since it allows a homeowner to capitalize on their asset’s value without having to sell it.
You retain ownership of the property even as the finance allows you greater flexibility to build wealth as an investor.

4. Risk appetite:

Whether you opt for equity release or any other type of finance, remember that it is debt, which means it comes with profit rates, and upfront costs associated with any such product.
Ask your bank to calculate your eligibility and what this debt means in your personal circumstances such as age, life stage, and financial commitments, among other factors.

5. Update your credit score:

Whether it is equity release finance or any other kind of finance, financiers rely on your credit report to make lending decisions.
In case of joint applications go over both people’s documentation for source of income, current liabilities, and payment history to strengthen your credit score.
Does good debt exist? Here are some tips to assess whether to borrow or not borrow.

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