If you’ve built up equity in your home (either by paying off your mortgage or because of an increase in the value of your property), and need some extra cash, a remortgage to release equity may be on your radar.
For many, however, financial decisions such as this usually come with a whole host of questions, such as how much will remortgaging to release equity cost, how long does it take, and what are the risks?
In today’s post, we’ll take a look at all those and more. So, if you’re thinking of remortgaging to release equity, but aren’t sure where to start, this guide is for you!
Remortgaging and equity: The basics
Before we get down to the nitty-gritty, let’s take a quick look at the two key factors in the process: Remortgaging and equity.
What does remortgaging mean?
In short, remortgaging is simply taking out a new mortgage on the same home. The reasons why you might do this stretch beyond releasing equity, such as getting a better deal when your fixed term comes to an end, but as this is a guide to remortgaging to release equity, that’s what we’ll be concentrating on today.
What does equity mean?
The dictionary definition does a great job of explaining what equity means:
the value of a mortgaged property after deduction of charges against it.
Basically, the equity in your home is the chunk that you own outright. So, for a property valued at £500,000 with an outstanding mortgage of £150,000, the equity would be £350,000.
As we touched upon in the intro, equity can grow in a couple of different ways, namely an increase in the property’s value or a decrease in the amount owed on the home (usually because of regular mortgage repayments made over time).
Your initial deposit, too, can impact your equity. The more you put down in the beginning, the greater your equity will be from the get-go.
How does remortgaging to release equity work?
Remortgaging for equity release is fundamentally a request to your existing lender (or an entirely new one) to increase your mortgage by the sum of cash (equity) you’d like to release.
Let’s take the example above where a property valued at £500,000 has an outstanding mortgage of £150,000. If you wanted to raise (release) £50k, you would be looking to remortgage at £200,000 (£150k + £50k = £200k).
What happens to mortgage repayments if you release equity?
As you can see, the process in and of itself really isn’t rocket science.
Where things can become tricky, however, is when you try to work out how your monthly mortgage repayments will be affected.
Obviously, as you are upping the amount you’re borrowing, it stands to reason that your monthly mortgage repayments will rise. The question is, by how much?
That’s where your loan to value (LTV) comes into play. The higher your LTV, the higher the interest rate is a general rule of thumb, although you may be able to offset increases if your new mortgage has a lower interest rate than the one that went before.
For more on LTV, see ‘What Is Loan To Value And Why Does It Matter?’
Can you remortgage with a high LTV?
Knowing your LTV is also important when you’re initially considering a remortgage to release equity, as many lenders won’t even think about allowing you to remortgage if your loan to value is greater than 75%. This is largely thanks to the lack of equity in place to back up the loan and the perceived risk the lender is taking.
Those that do offer remortgaging on LTVs of 80-90% will usually reflect that risk by demanding far higher rates of interest from their customers.
How to work out how much equity you have
To work out how much equity you have in your home, you will need two figures: How much your home is currently worth and how much is outstanding on your current mortgage. Once you have these, you simply subtract the amount owed from the value of your home to give you an idea of the amount of equity you have available to you.
Finding out how much you owe is simple, you can either call your lender and ask for a balance or refer to your latest statement to get the number you need.
Getting a current valuation on your home requires a little bit more legwork. For a rough idea, you can take a look at similar properties that have recently sold in your area via the Land Registry to get a ballpark figure. Another option is to call a local estate agent and ask them to come and value your home instead.
How long does the remortgaging to release equity process take?
Despite the relatively straightforward nature of remortgaging to release equity, the process can take a couple of months to complete, so it shouldn’t be seen as a quick fix.
Reasons to remortgage to release equity
The reasons why people choose to remortgage and release the equity in their homes are numerous and diverse. Some may choose to up their home loan because they are starting a business, while others may want some extra cash in order to pay off their short-term, higher rate debts.
Home improvements are also a popular reason, as is the growing need to fund ongoing care payments (see our guide on How To Avoid Selling Your House To Pay For Care for more on the latter).
You can even release equity by remortgaging for a deposit on a new home, if you wish. Some may use this to help their kids get on the property ladder, while others will go down this route to fund a buy-to-let venture.
Are there any risks?
Unfortunately, but not surprisingly, yes there are risks involved with remortgaging to release equity.
The most obvious is the fact that you will be borrowing more against your home. Even if your monthly repayments remain the same, you’ll still likely end up paying more overall and it’ll take you longer to clear the debt.
If the value of your home drops, you may find yourself in negative equity, which is where what you owe is greater than the property’s valuation and could result in your home becoming unsellable. Interest rates can rise, too, so it’s important to factor in interest increases when you run the numbers on any remortgage.
Last, but not least, failed remortgaging applications can adversely affect your credit rating, which could impact other areas of your financial life.
Remortgage to release equity: Pros and cons
Before we get to the alternatives to remortgaging for equity release, let’s get an overview of the pros and cons:
- Releasing equity can free up money that is tied into your property, but could be better used elsewhere.
- Released equity can be used for everything from a deposit on a new home to adding a conservatory to your existing one.
- For those with high equity, their LTV may be minimally affected.
- The process is relatively straightforward and easy to apply for.
- For some, remortgaging to release equity may not prove to be the cheapest way to raise funds.
- Early repayment charges may apply.
- The size of your mortgage goes up.
- The duration of your mortgage may be extended.
- Your interest rate may go up.
- Your LTV will be higher.
Remortgaging to release equity alternatives
A lot will depend upon the amount of cash you need to raise. For some, personal loans, or even credit cards, may actually turn out to be cheaper than remortgaging.
There are many credit cards on the market that offer 0% interest for the first 12 months, so if the amount you need is small and you’re confident you can pay it off in time, this could be a better route to take.
Petty Son and Prestwich is an estate agency with a difference. Our people-first ethos and pride in traditional values has stood us in good stead since 1908, and a far cry from our corporate counterparts.
If you are looking to buy, sell, rent, or let in or around the capital, call us to find out how we can help make your next move in the property market smooth and stress-free.