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- How remortgaging to release equity works
- How much equity can I release by remortgaging?
- What will happen to my mortgage repayments?
- Why might I release equity by remortgaging?
- Remortgaging to release equity pros and cons
- Is it a good idea to remortgage to release equity?
- What are the alternatives to remortgaging to release equity?
If you want to release equity from your property, you may be able to do it by remortgaging.
One of the main reasons people remortgage is to cut the cost of their mortgage repayments. However, switching to a new mortgage can also provide the opportunity to release equity from your home.
While property values have fluctuated of late, Nationwide data shows average UK house prices in January 2024 were still 21% higher than five years earlier.
This means that if you have owned your home for a reasonable period of time, the amount of equity you hold in your property is likely to have grown. (Equity is calculated by subtracting the amount you have left to pay on your mortgage from your property value.)
As such, if you need to raise some money, your home could be a useful source of cash.
Partner SpotlightThink carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
How remortgaging to release equity works
To release equity from your home, you increase your mortgage loan by the amount of equity you’re looking to release. In effect, you’re just borrowing more.
Say you want to release £20,000 of equity from a house that’s worth £300,000, with an outstanding mortgage of £200,000. You would simply ask to remortgage for £220,000, rather than £200,000.
You may want to remortgage with the same lender you’re already with or you can switch to a different provider. Remortgaging with your current lender is sometimes called a product transfer, and could be a slightly quicker and easier process than changing lenders.
However, new affordability and credit checks will be needed because you’re increasing the amount you borrow, as would happen if you moved to a new lender. It’s important to research other lenders anyway, and compare remortgage deals to make sure you’re not missing out on better options elsewhere.
As well as looking at the interest rate and monthly payment on any new mortgage, other remortgage costs need to be taken into account, too. These can include early repayment charges and exit fees for leaving your current agreement, as well as solicitor and setup fees for the new deal.
» MORE: How remortgaging works
How much equity can I release by remortgaging?
The amount of equity you can release will depend on a number of factors including how much equity you have in your property and the value of your home. The mortgage term you have left to run and your age can be important, too, as some lenders are more cautious when it comes to mortgages for older borrowers. (If you’re over 55, equity release may be an alternative to consider).
How much more you can afford to borrow will also be key, meaning your income, outgoings, existing loans and credit score will all be taken into account.
You can use an online mortgage borrowing calculator to find out how much you may be able to borrow overall, while many lenders allow borrowers to get a mortgage in principle online, which will give you a rough idea of the amount they’re willing to lend. This may also be called an agreement or decision in principle.
What will happen to my mortgage repayments?
As you are increasing your mortgage balance, the natural assumption is that your monthly repayments will rise. Extending your mortgage term may help keep repayments down, though a longer term means paying more interest overall. Remortgaging to a product with a lower interest rate could also help counter a rise, if you can find a suitable deal.
The interest rate you get will largely depend on the loan-to-value (LTV) of your new mortgage. The LTV is the value of your mortgage expressed as a percentage of the value of your property. The lowest mortgage rates are usually offered to borrowers with the lowest LTVs.
As you build up equity, you reduce your LTV. However, when remortgaging to release equity and borrowing more, your LTV could increase leaving you in a higher LTV bracket with potentially higher rates.
» MORE: See current mortgage rates
Why might I release equity by remortgaging?
People often remortgage to release equity to raise funds to pay for home improvements or remortgage to consolidate debts. Sometimes the money may be needed to help cover everyday expenses, or you may want to set up a business or need funds for school or university fees.
Homeowners with substantial amounts of equity might release equity to buy a second home for themselves or to help their children onto the property ladder.
A lender may ask what you are planning to spend the money on, and you may need to provide more information, such as a quote for your home renovations.
» MORE: How to remortgage for home improvements
Remortgaging to release equity pros and cons
There are some benefits to releasing equity through remortgaging, but some potential drawbacks to think about carefully, too.
Pros
- You can raise money for a wide variety of purposes, including home improvements, to pay off debt and to help loved ones.
- Funds can be raised without having to move or sell your home.
- You may be able to borrow more than through a personal loan.
Cons
- Your monthly repayments may rise because you’re borrowing more.
- It may take longer to pay off your mortgage.
- You may pay more in mortgage interest overall.
- There may be cheaper ways to borrow.
- Your mortgage rate may rise if you’ve had credit problems or are borrowing at a higher LTV.
- You may have to pay early repayment charges for leaving your existing mortgage.
- Falling into negative equity, where your mortgage is higher than your property value, becomes more of a risk if property prices fall.
- If you struggle with repayments your home will be at risk.
Is it a good idea to remortgage to release equity?
Remortgaging to release equity may be worth considering if you have a good amount of equity in your home and need to raise a sizeable amount of money. However, whether it’s affordable, and recognising that you’ll pay more interest on a mortgage that may take you longer to repay all needs to be taken into account.
What are the alternatives to remortgaging to release equity?
It’s always important to consider whether you have other options for raising the cash you need before deciding to remortgage to release. Although you might view the equity in your home as your money, borrowing it from your mortgage lender may not be the best option.
Personal loan
Depending on the amount you need to borrow, a personal loan could be an option that works out cheaper overall. Personal loans are usually available for up to £25,000, and will usually have a higher interest rate than a mortgage. However, because you’re able to pay a personal loan back over a shorter period of time, and there are usually fewer fees involved, it could end up costing less in interest overall than remortgaging.
Credit card
The borrowing limits on credit cards tend to be lower than for personal loans, and the interest rates that you’ll pay at the end of an introductory period will almost certainly be higher. However, for smaller sums that you can definitely repay quickly, a credit card that charges 0% interest for a year or two could prove a better alternative to remortgaging.
Further advance on your mortgage
Rather than remortgaging, you may be able to get a further advance on your current mortgage from your existing lender. The rate you pay may be different to your current deal, but there could be fewer fees. You may also be able to keep your existing rate for your main mortgage, which may be lower than you’d find on the latest remortgage deals.
Joint mortgage
If you’re a parent wanting to help a child onto the property ladder, you could consider a joint mortgage to boost their chances of getting a mortgage and the amount that could be borrowed. Another option is a guarantor mortgage, where you promise to cover the repayments on your child’s mortgage if they don’t. The risk is that you could lose your own property if you don’t pay.
Equity release
Equity release may be worth considering if you’re aged 55 and over. With a lifetime mortgage, you can gradually release the equity in your property to provide an income or take lump sums. No repayments are necessary until you move into long-term care or die. However, interest rates are higher and interest can quickly build up, you’ll have less or perhaps no inheritance to pass on, and any means-tested benefits you receive may be affected.
» MORE: Is equity release or remortgaging right for you?
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