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Remortgage to release equity

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Remortgage to release equity

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Last reviewed on 30th March 2022

Releasing equity from your home by remortgaging can be a useful way of borrowing. Switching to a new deal can also cut your mortgage costs down, saving you money in the process.

Remortgaging to release equity is often used for:

Some lenders will want to know how you plan on spending your equity, but the choice will typically be yours. You may want to treat yourself to a new car or a holiday, you may even want to gift a mortgage deposit to a loved one.

How does remortgaging to release equity work?

When you release equity with a remortgage, you’re essentially borrowing from your home. As a result, your existing mortgage balance will increase. For instance, if your property is worth £250,000 but the outstanding mortgage is £150,000, your remortgage of £200,000 will release £50,000 of equity.

Lenders won’t allow you to remortgage the full value of the property, as this would be a 100% mortgage. You’d need to leave some equity in your home, providing a similar purpose to a deposit.

If your current lender allows you to release equity, then you’ll simply need a product transfer rather than remortgaging. That being said, a different lender may be willing to offer you a better rate, giving you more of an incentive to switch.

How much equity can I release from my home?

Equity can be quite simple to calculate as it’s the value of how much you own in your property. If you purchased a property with a 20% deposit, you’d have 20% equity at that time. Your equity increases as you pay your mortgage and as house prices increase.

Take a look at this example of calculating equity:

Current property value: £250,000
Outstanding mortgage: £150,000
Equity = £100,000

Equity can also be calculated if your property value has increased:

Property purchase price: £250,000
Outstanding mortgage: £150,000
Current property value: £300,000
Equity = £150,000

Will my mortgage payments increase?

Releasing cash from your home will often result in a larger mortgage, as you’re borrowing more against your home. As a result, you’ll need to assess whether switching deals is viable.

The main reason for remortgaging is usually to find a better mortgage rate. But, when you release equity, your new interest rate is likely to be higher than what you currently pay. This is because your mortgage balance will increase.

If you have equity in your home, there shouldn’t be any real reason stopping you from releasing some capital. That being said, each lender will make an assessment of your current circumstances before making a decision. Without equity, you won’t be able to remortgage at all.

What is negative equity?

A decrease in property value can leave you in negative equity. If you’re in negative equity, then you won’t be able to remortgage. This is because there is no equity to release.

See the example below:

Property purchase price: £250,000
Outstanding mortgage: £225,000
Current property value: £200,000
Negative equity = £25,000

How much equity do I need to remortgage?

If you have a substantial amount of equity in your home, then releasing some of the cash in your home can make sense. In comparison, having a small amount of equity may leave you with hardly any capital to release and therefore may not be viable.

Each time you release equity, you’re increasing the loan to value (LTV) of your mortgage. For instance, if you have 40% equity and decide to release 20%, you’d increase your loan to value from 60% to 80%. As your loan to value increases, so does the cost of your mortgage. Furthermore, mortgages with higher LTVs often have higher rates.

While there isn’t a specific amount of equity you’ll need, the more equity you have, the better. The reason for your remortgage will also play a factor in how much capital you’ll need to release. This will then give you an idea of the amount of equity you’ll need to remortgage.

How can I increase the amount of equity I have?

You can increase the amount of equity you have in two ways. The first method is if your property increases in value. The second method is by repaying your mortgage over a period of time. As you repay your mortgage, your outstanding balance decreases. This then increases the equity you have.

Using our example of negative equity, once your outstanding mortgage is below £200,000, equity will start to accumulate. This will only happen if your property value doesn’t further decrease.

For instance, if your outstanding mortgage balance was £150,000, then there would be £50,000 of equity. Any equity you’ve accumulated can then be released either with a remortgage or by selling your property.

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What are the pros and cons of remortgaging to release equity?

There are certain pros and cons to think about before deciding on changing mortgage deals.

Pros:

  • You may find better rates by switching deals
  • Use the equity to invest or spend on your home
  • The process of remortgaging is typically straightforward

Cons:

  • Your mortgage balance will increase
  • It could be an expensive way of borrowing, depending on your mortgage
  • You could be charged for remortgaging early
  • The length of your mortgage term will likely increase

Are there any alternatives for releasing equity?

If you need access to capital, a remortgage isn’t always the best option and requires careful consideration. For example, if you’re on a great mortgage rate, current rates may be higher.

Having an unbeatable mortgage rate may mean that a remortgage isn’t the most viable option. If raising funds is a matter of urgency, but you don’t wish to jeopardise your current mortgage deal, a secured loan may be a better option. That being said, secured loan rates will be higher than mortgage rates so it certainly isn’t something to rush into.

Read more: Should I remortgage or use a secured loan?

Should I remortgage to release equity from my home?

Releasing equity often means taking on a larger mortgage than you currently owe. This means an increase in monthly repayments and can extend the duration of your mortgage term. A remortgage is a new financial commitment, so it isn’t something that should be rushed.

Releasing equity often means taking on a larger mortgage than you currently owe. This means an increase in monthly repayments and can extend the duration of your mortgage term. A remortgage is a new financial commitment, so it isn’t something that should be rushed.

The first thing you should calculate is the approximate amount of equity you have. Estate agents usually offer valuations and can give you an indication of how much your property is currently worth. You can then calculate the equity you have, by comparing the value to your mortgage balance.

Be sure to clarify the cost of a valuation before arranging one, as all companies will vary. Once you apply for a remortgage, your lender may carry out a mortgage survey to establish the value of your property.

As each case is different, you can make an enquiry with an advisor. We’ll then assess your individual circumstances to inform you on whether or not a remortgage is advised.

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About the author

Mortgage Advisor | More Articles

Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.