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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, for example when a fixed rate runs out. However, when you switch to a new mortgage you can also take advantage of the opportunity to release equity from your home.
Property prices have risen substantially in recent years. In the 12 months to June 2022 alone, house prices rose by 13%, according to the Halifax House Price Index, taking the average UK property price to a new record high of £294,845.
This means that if you have owned your home for a reasonable period of time, the amount of equity you hold in your property – that is the money that would be left after you repaid the mortgage – is likely to have grown beyond the value of your deposit and the capital you repay each month.
As such, if you need to raise some money, your home could be a useful source of cash.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a loan or any other debt secured on it
How remortgaging to release equity works
When you want to release equity from your home, you ask your current or new lender to increase your mortgage loan by the amount of equity you’re looking to release.
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 can either ask to do this with your existing lender, or remortgage with a different lender. If you stay with your current lender it’s called a product transfer, and if you borrow more from your current lender it’s called a further advance. Using comparison sites or a broker can help you find the best remortgage rates, but check what your current provider can offer too.
As well as reviewing the interest rate charged and monthly payment, review other costs before going ahead. These can include early repayment or exit fees for leaving your current agreement, along with solicitor and setup fees for the new deal.
How much equity can I release?
The amount of equity you can release will depend on a wide variety of factors including how much equity you have, the value of your home, the outstanding term of your mortgage and your age. Lenders will be more cautious about lending to older borrowers.
Your income, affordability and credit rating will also be taken into account.
You can try online remortgage calculators to find out how much more you could borrow – many lenders and brokers offer them on their websites. For a clearer picture it may be worth speaking to a mortgage broker.
» MORE: Are you remortgage ready?
What will happen to my mortgage repayments?
As you are increasing your mortgage balance, your monthly repayments will rise,unless you also extend your mortgage term. However, if you can remortgage to a deal with a lower interest rate you can soften the blow.
The interest rate you get will depend on the loan-to-value (LTV) of your new mortgage. This is the ratio of the value of the mortgage against the value of the property and is expressed as a percentage. The lower the LTV, the lower the rate you’ll get.
Say you have 30% equity in your property. This would make you eligible to remortgage onto a 70% LTV loan, however, if by releasing equity the LTV leapt to 80%, you are likely to pay higher interest rates.
If, however, you have more equity in your home, and releasing equity doesn’t have a significant impact on the LTV, your interest rate won’t necessarily jump.
The lowest interest rates are typically for borrowers in the 60% to 65% LTV range.
Can I remortgage if I have bad credit?
It’s also worth noting that you may not be eligible for the best remortgage deals if you have poor credit, or your credit record has deteriorated since you took out your mortgage.
You may still be able to remortgage but it is likely to be at higher rates.
In these instances, it could be worth discussing your options with an independent mortgage broker as well as considering whether further borrowing is wise.
» MORE: How to improve your credit score
Why might I release equity by remortgaging?
You can spend the money you release as you wish. However, people often remortgage to release equity as a way of funding home improvements, for example, or to consolidate other debts. You may want to set up a business or raise funds for school or university fees.
Older homeowners with substantial amounts of equity in their homes might use the money to help other family members, for example, to help children get on the property ladder.
You might need to tell your lender what you are planning to spend the money on, and you may need to provide more information, such as a quote for a home renovation project.
Remortgaging to release equity pros and cons
- Linking new borrowing to your mortgage is simple and straightforward.
- You can raise money for a wide variety of uses.
- You are increasing the size of your mortgage.
- There may be cheaper ways to borrow.
- Your mortgage rate may rise if your credit record has worsened or you are increasing the LTV of your mortgage.
- You may have to pay early repayment charges when you pay off your old mortgage.
- If you struggle with repayments your home will be at risk.
Are there alternatives to remortgaging to release equity?
Although you might view the equity in your home as your money, unless you sell up you will still have to borrow it from your mortgage lender to get your hands on it, and this may not be the cheapest option.
Depending on the amounts you need to borrow, a personal loan or low rate or interest-free credit card could work out cheaper. Personal loans are usually available for amounts up to £25,000 while upper limits on credit cards can be in the region of £15,000 if you have a good credit score.
Much will depend on how long you will need to repay the loan and, as a rule of thumb, the longer a debt takes to repay the more it’s likely to cost overall.
If you remortgage to release equity you will be paying the money off for the term of your mortgage. Depending on where you are in the agreement, this could still be a decade or two. So while a personal loan might carry a higher interest rate than your mortgage, it could work out cheaper, if it means you repay the debt faster. The maximum term on most loans is usually 10 years but they are often taken out over much shorter periods.
For smaller sums that can be repaid quickly a credit card that charges 0% interest for a year or two could be the cheapest option.
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