Can I Remortgage My Home to Release Equity?
If you have equity tied up in your home you may be keen to release it so you can use it for home improvements, consolidating debt or to help children with university costs or getting onto the property ladder. This guide aims to provide an overview of how you can achieve this.
What is Equity?
Equity is simply a term that refers to how much of the property you own outright. If you bought a house for £300,000 and put in a deposit of £30,000, you would have a mortgage for £270,000 and own a 10% equity stake in the house.
Assuming the market value of your home stays level, your equity increases as your mortgage value goes down, because you will have paid more of the loan off. However, if the market rises your equity stake can increase that way too.
If, in the example above, if the owner of the property paid off £20,000 over five years AND the value of the house increased to £320,000, their equity stake would increase from £30,000 to £70,000.
What Happens When I Remortgage?
If you choose to remortgage to release some of the equity in your home, you effectively take out a new, larger mortgage that is based on the higher value of your property and the lower value of your loan.
So, if the house described above is now worth £320,000 and the mortgage balance is now £250,000 they could choose to remortgage for, say, £280,000 and receive £30,000 in cash.
How Much Equity Should I Release?
You should consider this carefully, making sure that you understand the loan-to-value ratio and the impact this may have on the interest rate you pay.
Lenders reserve their best deals for borrowers taking out mortgages at a lower loan-to-value, typically in the 60% to 65% range. So, if your equity release takes you to a mortgage with a higher LTV you will very likely be paying a higher rate of interest as part of your repayments.
Is it a Good Idea?
Whether or not you should release equity tied up in your home depends very much on your specific circumstances. The following pros and cons may help you weigh up what you could stand to gain (or lose) from deciding to go ahead:
Pros:
- You will be unlocking some money which you can put to good use.
- If your home has increased in value significantly, you may end up with a lower LTV (loan-to-value) than you currently have, which may bring interest rates and monthly repayments down.
Cons:
- You are increasing the size of your loan and your monthly payments may go up, depending on your LTV.
- House prices can go down as well as up. If that happens the equity you have built
up could quickly disappear, potentially even leaving you in negative equity.
- Remortgaging can be costly (more below)
What Will it Cost Me?
Mortgaging to release equity does come with certain fees attached. If you remortgage during a fixed term, you will probably be liable to an early repayment charge. This is generally calculated as a percentage of the outstanding loan, so it can be a significant outlay.
For example, a 5% ERC on a £250,000 mortgage works out at £12,500. This could have a huge impact on the amount of equity you could release.
There may also be other fees to consider, for example arrangement fees and legal fees. It is worth shopping around to find the best deal for your remortgage, as some lenders will reduce or even remove these fees to entice customers.
Where Can I Get Advice?
Talking to a Financial Adviser could help you decide if remortgaging to release equity is right for you. They will also be able to research the market to find you the best remortgaging deal based on your individual circumstances. Make sure you choose someone who has the specific qualifications needed to advise on mortgage products.