Updated 10 November 2020
If you have paid off a good chunk of your mortgage or the value of your house has gone up, you may have built up a lot of equity in the property. Remortgaging to release equity could be a way to access extra cash – perhaps for home renovation, repaying short-term debts or helping with your children’s education. If you are considering this, you will need to weigh up such benefits against the longer-terms costs of doing so, and also look to see if there are any better-value alternatives.
N.B. This is not the same as equity release as a source of retirement income. Find out more about retirement equity release.
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Your equity is the percentage of your home that you own outright. It’s the difference between the amount left to pay on your mortgage and the property’s market value.
Equity is related to loan-to-value (LTV) ratio, which is the difference between the mortgage left to pay and the property’s value. For example, if you buy a house for £200,000 with a £150,000 mortgage and a £50,000 deposit, the LTV is 75 per cent and your equity is £50,000 (the size of your deposit).
Both LTV and your equity will usually change over time. For example, if the house’s value increases to £250,000 your equity becomes £100,000 and the LTV becomes 60 per cent. If you’ve also paid off £10,000 by that time, the LTV would be 56 per cent, and so on.
Your lender will use your LTV to discuss rates if you want to remortgage to release equity. A lower LTV (i.e. more equity) generally means better rates for you.
People choose to borrow more money against the value of their house for a number of reasons. Bear in mind that not all of these reasons are necessarily good ones, and remortgaging may not be the best solution in each case!
It is worth emphasising that remortgaging to release equity is just another way of borrowing money. This means it puts you deeper in debt, and for a longer period of time than a short-term loan.
However, another option is to borrow more money against the property. Homeowners most often consider this an option if their home has risen significantly in value (thus lowering the LTV and increasing their equity). This means that they can borrow more money without necessarily increasing their monthly repayments – because the extra equity has come from the increase in the property’s value.
To use the previous example: if your house has risen in value from £200,000 to £250,000 and so changed the LTV from 75 per cent to 60 per cent, you could EITHER get a lower repayment rate, OR you could keep the same repayment rate and borrow that extra £50,000 (to keep the LTV at 75 per cent).
In the same way as when you first took out your mortgage, a lender will want to check over your finances and your credit record to calculate an offer based on their lending criteria. Some lenders have calculators on their websites, which give you an idea of the amount you could borrow. A mortgage broker can give you an unbiased picture of your borrowing prospects.
In addition, the mortgage lender’s offer will depend on how much equity you currently own. Your age is also a factor. It can be more difficult to remortgage your property when you are nearing retirement, because it is assumed that you will have less income to pay off the loan. The top age limit for new mortgages is typically 65, but you may struggle to remortgage if you are over 50.
All of this information will be used to determine how much extra they will let you borrow, and how good a deal they will offer you.
When remortgaging, you may have to pay an early repayment charge – these fees can apply even beyond the end of your fixed-term period. The amount to pay is typically a percentage of the outstanding loan, so can run into thousands. You might also have to pay an exit fee (not the same thing!). In addition, your new mortgage may have set-up fees, depending on the lender and the specific deal.
On the other hand, if you can get a significantly lower interest rate it may counteract these costs. And if your home’s value has increased a lot, then even with the extra costs you may ultimately consider it to be worthwhile.
The most important tips to bear in mind are:
Remember that you remortgage to release equity, you are increasing your loan. If your home has risen in value then it may not feel that way (since your repayments may not change), but you will still end up paying back more than you otherwise would have, and it will probably be longer before you finish paying off the loan.
If you borrow more than the amount by which your equity has increased, then your loan-to-value ratio will rise. This may result in higher repayments, so you’ll need to make sure you can afford these (and will continue to afford them even when interest rates rise).
Bear in mind too that if house prices were to fall, you could find yourself in negative equity. Negative equity means that your outstanding loan is larger than the total value of your home. This is a bad predicament to be in, as it can make it impossible to remortgage, and very hard to sell your home.
Also beware of remortgaging without first taking advice. Rushing into it may mean you are turned down by multiple lenders, which will affect your credit score. Wait until a mortgage broker is confident that your application will succeed.
Remortgaging may not be the easiest or the best value way for you to access extra money. Here are some alternatives to consider:
It can take between four to eight weeks for the application process to complete, so do give yourself plenty of time to apply before you need the funds.
Your mortgage terms will say whether you can let your property. Some mortgage deals specify a period where the property has to be your main residence, so do check the terms carefully before renting your house out.
You can release equity from your house to put down a deposit on another property, but you will usually need significant equity to do this. If you want to let the property, you will need to a buy-to-let mortgage. These mortgages tend to need a 25 per cent deposit, are often interest-only and usually carry higher interest rates and fees. It is a good idea to get financial advice before taking this step.
If you have remortgaged to release equity and decide to move home, you can either port your mortgage (take it with you to your new home) or apply for a new mortgage. The most cost-effective option depends on your circumstances.
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