Remortgaging to release equity from your home

If you’ve been paying off your mortgage for a good few years, there’s every chance that you’ve built up a fair bit of equity. Remortgaging could give you access to the cash you’ve built up in your home if you need it.

But is it the right solution for you? Read on to find out if it’s worth remortgaging to release equity from your home.

If you’ve been paying off your mortgage for a good few years, there’s every chance that you’ve built up a fair bit of equity. Remortgaging could give you access to the cash you’ve built up in your home if you need it.

But is it the right solution for you? Read on to find out if it’s worth remortgaging to release equity from your home.

Mark Gordon
From the Mortgages team
9
minute read
Do you know someone who could benefit from this article?
Posted 9 SEPTEMBER 2021

What does remortgaging mean?

Remortgaging is when you take out a new mortgage on the same property. You can negotiate a new deal with your current provider or start again with a different provider. It means that you’ll stay in your existing home and use the equity you have in the property as security for the mortgage.

When you get to the end of a fixed-rate mortgage deal – usually between two to five years – you’ll be moved onto your mortgage lender’s variable rate mortgage, which typically means paying a much higher interest rate. By remortgaging you could switch to a better deal with lower interest rates and lower monthly repayments.

Another reason to remortgage is to release some of the equity in your home. You’re essentially borrowing more against your property in order to free up cash. This means your mortgage will increase and your monthly repayments are likely to go up.

Remortgaging to release equity means that you’re securing a loan to free up cash, rather than it being tied up in your home. It also means you’re taking on more debt, so it’s important to weigh up the pros and cons before going ahead. If you’re not able to keep up with the new mortgage repayments, you could risk losing your home.

What is equity?

Equity is the portion of your home that you own outright. Let’s say you own a property valued at £300,000 and you have £100,000 of mortgage left to pay. The equity, or the part you own outright, would be £200,000. If you’ve finished paying off your mortgage, your equity would be the whole £300,000.

Your equity also includes the amount of deposit you put down when you buy a home. The larger your deposit, the more equity you’ll have right from the very start. You’ll also have more equity if the value of your property goes up.

What is LTV?

If you’re thinking about remortgaging to release some of the equity in your home, it’s important to understand your property’s loan-to-value ratio. (LTV).

LTV is the difference between the size of your mortgage and the amount of equity in your home. LTV is always displayed as a percentage. For example:

If you’re buying a house for £200,000 with a deposit of £50,000, you’d need a mortgage for £150,000. So, the LTV would be 75% and your equity would be £50,000 – in other words, you’d own 25% of the property outright. As you pay off your mortgage, or your home increases in value, the LTV will go down and your equity will go up.

When it comes to remortgaging, your mortgage provider will use your LTV to work out the interest rate they’ll charge. Typically, the lower your LTV, the better rate you’ll be offered. While many mortgage providers won’t let you remortgage if your LTV is higher than 75% - as there’s very little equity to act as security against the loan - some will consider remortgaging for up to 85% or 90% LTV. But the interest rate you’re offered may reflect the potential higher risk.

Read more in our guide to loan-to-value ratio.

Your home could be repossessed if you don’t keep up repayments on your mortgage.

Why remortgage to release equity?

There are many reasons why you might want to remortgage to release equity. For example, to:

  • fund home renovations
  • put your kids through university
  • help your child buy their first home
  • repay short-term debts
  • start a business
  • fund care services and needs

Be aware that remortgaging to release equity isn’t the same as equity release. Equity release is for homeowners over the age of 55 with little or no mortgage who want access to extra funds during their retirement. Equity release gives you a tax-free lump sum of money, or a regular income, in exchange for part of the value of your home. The amount borrowed is paid back from the sale of your house when the last homeowner dies or moves into permanent, long-term care.

Find out more about equity release for retirement.

How does remortgaging to release equity work?

Remortgaging to release equity is slightly different from taking out a new mortgage to buy a home. This is because you’re still living in your home and have probably paid off a large chunk of your mortgage already. In most cases, you’ll need a decent amount of equity in your home before you can remortgage.

Let’s say you buy a house for £250,000 with a £50,000 deposit and a £200,000 mortgage – your LTV would be 80%. Five years later, the value of the house has increased to £300,000 and you’ve paid off £20,000 of your mortgage. As a result, you still owe the remaining £180,000, but your equity is now £120,000.

By remortgaging for £200,000, you’ll free up £20,000 to spend elsewhere and your LTV will be 66% - lower than the original LTV when you bought the house.

Just remember that when you remortgage to release equity, you’re essentially borrowing money based on the value of your home. Even with a lower LTV, it still means you’ll be taking on a larger mortgage with potentially higher repayments.

How much equity do I own?

You can get a rough idea of how much your house is worth by checking the Land Registry for similar properties in your area that have recently sold.

Another option is to get an estimated valuation from a local estate agent. Then simply work out the estimated market value of your home minus the outstanding mortgage you still owe. The remaining amount is the equity you own. It won’t be an exact figure, but it will give you a rough idea of how much cash you could release.

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

Pros:

• Free up money that would otherwise be tied up in your home.
• Use the cash to fund whatever you like: kids’ university fees, a gifted deposit or a new extension.
• If you have a large amount of equity that’s built up, remortgaging might not significantly change your LTV.
• A lower LTV could mean a better interest rate on your new deal

Cons:

  • If you’re taking on a larger mortgage, your monthly repayments will very likely go up.
  • You’ll end up paying back more over a longer period of time.
  • It could work out much more expensive than a personal loan.
  • If you can’t afford the repayments, your home could be repossessed.
  • If house prices fall you could find yourself in negative equity – this is when the outstanding mortgage is higher than your home’s value.
  • If you’re still in the introductory period of your current mortgage, you may face a hefty Early Repayment Charge to remortgage – this could be as much as 5%.
  • Rushing in without first taking financial advice could jeopardise your chances of being approved and damage your credit score.
  • There may be other, better value ways to raise the cash you need.

What are the alternatives to remortgaging?

Remortgaging isn’t the only option for homeowners looking to raise cash. Before you make a decision, consider the following alternatives:

  • Further advance from your existing lender – talk to your current mortgage provider as you may be able to borrow more on your existing mortgage rate or a competitive rate. This also means you’ll avoid any early repayment charges and the legal process for switching providers, which can make it a faster and more cost-effective option.
  • Personal loan – the interest rate will typically be higher, but you can pay it off over a much shorter period of time, so it could work out cheaper than remortgaging. Depending on your circumstances, you could borrow up to £25,000 and the funds could be transferred in as little as one to two days.
  • Money transfer credit card – for a smaller amount, you could use a money transfer credit card to transfer money into your bank account. Some offer 0% interest for a certain period – just make sure you pay off the full balance before the 0% period ends, or you could be hit with high interest charges.
  • If you want to help your child get on the property ladder, a joint mortgage will take into account both your incomes, so they may be able to borrow more. Or you could act as a guarantor – you guarantee to pay the mortgage if your child can’t keep up with repayments. Just be aware that you could also lose your home if you can’t make the mortgage repayments.
  • Equity release mortgages can be suitable for some older (55+) homeowners. A lifetime mortgage could provide income from the value of the house without increasing monthly outgoings. The money wouldn’t need to be paid back until your home is sold, typically when the last homeowner dies or goes into long-term care.

Should I get remortgaging advice?

Remortgaging to release equity is a big financial decision that shouldn’t be taken lightly. If you’re not able to keep up repayments you could lose your home, so it’s always best to get expert advice before going ahead.

We’ve partnered with London & Country Mortgages Ltd (L&C)** to provide you with fee-free expert mortgage and remortgaging advice. Get in touch with one of their advisers here:

Go to L&C

**London & Country Mortgages Ltd (L&C) are a multi-award winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, who are authorised and regulated by the Financial Conduct Authority (143002).

L&C are not part of Compare the Market Limited. Compare the Market receive a % of the commission that our partner London & Country earns. All applications are subject to lending and eligibility criteria.

L&C will not charge you a broker fee should you decide to proceed with a mortgage.

Your home may be repossessed if you do not keep up repayments on your mortgage

Frequently asked questions

How much equity could I release from my home?

The amount of equity you could release depends on your personal circumstances, financial situation and your lender’s criteria, which may have changed since you first took out a mortgage.

Your lender will look into your finances again and check your credit rating. They’ll use this information to decide how much you can borrow and what deal they’re prepared to offer you.

Top Tip

If your credit score isn’t at its best right now, you might want to consider putting off remortgaging or applying for other types credit until you’ve built it back up again.

How long will it take to release equity through remortgaging?

The remortgaging application process can take up to a couple of months, so make sure you leave yourself plenty of time before the money is needed.

Can I still move house if I remortgage?

Yes, you can still sell up and move, even if you remortgage. You can either port your mortgage (take it with you to your new home) or take out a new mortgage. You should talk to a financial adviser about your options and the costs involved to see which offers better value for you.

How much will remortgaging cost?

If you’re still in the introductory period of your current mortgage, you might have to pay an early repayment charge. You’ll also typically have to pay:

  • mortgage arrangement fee
  • valuation fee
  • conveyancing and legal costs

You might also have to pay a booking fee, or broker’s fee.

Some remortgages may include particular fees as part of the package. This can vary among providers and mortgage brokers, so make sure you understand exactly what extras you’ll need to pay.

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