Correct at 30/06/2023
If you’ve built up equity in your home and are looking to free up some capital, then you might be considering remortgaging to release equity. We’ve rounded up everything you need to know to work out whether this is the right option for you and your personal circumstances.
A remortgage is when you take out a new mortgage deal to replace your existing one. You could do this for a number of reasons. Most commonly, people will remortgage their home when they come to the end of their existing mortgage deal, as otherwise they’ll be switched to their lender’s Standard Variable Rate which is usually more expensive.
Another reason for remortgaging is to release equity - so let’s take a look at this in more detail.
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When you remortgage to release equity, it means that you’re borrowing more against your home in order to free up money.
Equity is the portion of your home that you own outright - in other words, it’s the difference between the value of your property and the amount you owe on your mortgage.
Equity can increase in two different ways. As you pay off your mortgage, your equity will increase as your mortgage balance decreases. This is only applicable if you have a repayment mortgage - if you have an interest-only mortgage your monthly payments only cover the interest you owe so the amount you owe doesn’t go down.
Your equity can also increase when the value of your home goes up (or decrease if it goes down).
So, if you have a property worth £250,000 and you have £100,000 left to pay on your mortgage, then your equity is £150,000, or 60% of the total value.
If you remortgage to release equity, your mortgage will increase, and your monthly repayments will usually go up - but you’ll have extra funds which you can do with as you please. Many people use this money for home improvements, but you could also use the money to put down a deposit on another home or a Buy to Let property.
Before you remortgage to free up equity in your home, consider the two other ways people might release equity: selling their home, and downsizing to a cheaper property. Both of these will release funds from your home which you can then use to buy a new property, fund home improvements, help a family member to purchase a property, pay off debts, or whatever else you plan to do with the funds.
However if you don’t want to downsize or buy a new home you can remortgage, either with your existing lender or a new one. To do so, you just need to take out a new mortgage that’s larger than your existing one.
So, if you owe £100,000 on your mortgage, but you take out a new mortgage of £120,000, you’ll have £20,000 extra - although you’ll have to take into account any fees that might eat into that amount.
When you remortgage for a higher value, you will reduce the amount of equity in your property. In this example (where you had £150,000 or 60% equity on a £250,000 home, but choose to remortgage for £120,000 rather than the £100,000 you owe), you’ll now have £130,000 or 48% equity in the property.
For a regular remortgage, where you’re just switching the same amount to a new lender, deals are usually available if you have 10% or sometimes 5% equity.
However, if you’re remortgaging to release equity, lenders will sometimes limit the amount you can release depending on what you are using the extra funds for. The amount of equity you need varies between lenders. Some will cap the loan to value/LTV (the size of mortgage a lender is prepared to offer you in relation to the value of the property) at 75%, so you’ll need to have at least 25% equity, while others will go as high as 90% depending on your circumstances.
Lenders will also do an assessment of your finances when considering your application to remortgage to release equity, and homeowners who have more equity are usually deemed to be a lower risk by lenders.
In theory, you can release the amount of equity that will take you to your lender’s maximum LTV ratio. If you take out a 95% mortgage, for example, you could increase your mortgage accordingly to release a bigger chunk of equity.
In practice, though, the amount of equity you release will depend on a wide range of factors. Lenders assess your eligibility to remortgage on a range of different criteria, but they’ll look closely at your income and outgoings, and what you’re planning to use the released equity for.
They will also (of course) look at; how much equity you have, the value of your home, how long you have left on your mortgage, and your age (in relation to retirement).
Lenders will also look at your credit rating when assessing your application.
The higher your loan to value ratio, the more expensive your mortgage is likely to be, so it’s a good idea to only release as much equity as you really need to. Remember too, that the more you borrow the more interest you’ll have to pay over the term of your loan.
However, if you’re raising money for home improvements it’s important to consider whether the work you’re planning on carrying out will bring any additional value to your home. If you’re adding an extension, for example, this could increase your home’s value significantly, offsetting the additional interest costs you’ll have to pay.
It can be useful to speak to a fee free mortgage broker like L&C to get a better picture of how much equity it’s likely you could release, and to find suitable mortgage deals for your circumstances.
Generally you can’t remortgage a property until you’ve owned it for at least 6 months, but most people choose to wait until their current mortgage deal has ended before remortgaging. This is usually because you’ll be subject to Early Repayment Charges on your existing deal otherwise.
It can take anything between 4-8 weeks, or even longer to remortgage your home, so you should be sure to start the process well in advance, giving yourself plenty of time before you need the money. If you want to avoid falling on to your lender’s Standard Variable Rate you need to start your remortgage at least 3 months in advance, although it’s possible to start the process up to 6 months before the end of your current deal.
The process isn’t overly complicated and here at L&C our expert advisers will walk you through the process. It’s important to consider whether remortgaging is the right option for you if you need extra funds, so you should make sure you weigh up all the pros and cons before going ahead. You should also consider the different solutions, such as a personal loan, credit card, or a further advance from your existing lender, especially if your current deal has Early Repayment Charges.
Firstly, and most obviously, it releases money that would otherwise be tied up in your home. That means you can use it for whatever you like, whether it’s building a conservatory, paying your child’s university fees, gifting a deposit, or paying off personal debt.
If you have built up a large amount of equity in your home, then it may be the case that it doesn’t actually change your LTV very much, meaning you’ll still get a good mortgage deal.
Remortgaging for this reason could work out more expensive than simply borrowing the money with a personal loan.
The timing of your remortgage is also important to consider. Early Repayment Charges can be significant, so if you’re still within your introductory period you may find it’s not a cost effective way to release equity.
Finally it’s important to remember that if house prices fall, you could find yourself in negative equity. That means that the amount you still owe on your mortgage is higher than what your home is worth.
If you’re a landlord, you could also remortgage your Buy to Let property to free up money. Perhaps you want to make improvements on that property or even invest in another rental property. Either way, you might be able to remortgage your Buy to Let property to release equity, and the process is much the same as for residential mortgages.
Lenders have different criteria for Buy to Let remortgages, so it’s best to speak to a mortgage broker like L&C to determine whether this is the best option for you and how much you can borrow against your rental property.
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