Releasing equity in your property

Find out more about property equity, and what you should consider if you're planning to release equity in your home.

Shakila Hashmi From the Mortgages team
3
minute read
posted

What is equity?

Equity is the share of your home that you own outright. You can work out how much equity you have by deducting your remaining mortgage from the property's value.

So, if your home is worth £300,000 and the outstanding amount you owe is £225,000, then your equity is £75,000. You might be able to borrow against some of this equity to raise cash – a process known as remortgaging.

Releasing equity is a big financial commitment and you'll need to think carefully about whether you can afford to do it.

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How can my equity increase?

Typically, your equity can increase if:

  • your property's value goes up
  • you reduce your mortgage by paying or overpaying each month - however, you can only do this on a repayment mortgage.

While your regular payments on a repayment mortgage will gradually reduce your debt, you can usually choose to overpay, either on a monthly basis or with a one-off sum. Most repayment mortgages impose limits on the amounts you can overpay, so you'll need to find out what these are if you want to go down this route. If you exceed these limits, you'll pay a penalty for doing so.

You can't pay down or overpay your mortgage if you're on an interest-only deal, where the capital is repaid at the end of the term. Today, the vast majority of mortgages are arranged on a repayment basis.

Understanding your loan to value (LTV) ratio

Before you decide whether to release any equity from your home via a remortgage, you'll need to assess what the impact could be on your loan to value ratio (LTV).

The LTV ratio is the amount you're borrowing on a mortgage relative to the overall value of a property. As a general rule, the higher the LTV, the higher the rate of interest you could be charged when applying for a mortgage (or negotiating a re-mortgage).

Let's say you bought your property for £200,000 with a £20,000 deposit. Your deposit is 10% of the value and your mortgage, at £180,000, is 90%. So your LTV is 90%. Assuming your property value stays at £200,000, and you pay off £20,000 of debt on your repayment mortgage over, say, five years, your total equity would be £40,000. So, your LTV ratio would decrease to 80% (because your mortgage debt would now be £160,000). Your LTV ratio would decrease further if your property had increased in value over the same five-year period.

Your equity can decrease if house prices drop

Remember that if the value of your property falls, your equity reduces, making it less likely that you'd be able to access your equity by remortgaging. Lenders want to see a relatively low LTV before they'll consider offering a remortgage to release equity.

As a rule, if you're looking to remortgage, your LTV should be around 60%. And taking on the additional debt via a remortgage should not push your LTV beyond, say, 80%. But each lender will set their own exact levels.

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Why would I release equity in my home?

There are many reasons you might release some of the equity in your home, including:

  • To pay for work that extends or improves your property, for example to accommodate an elderly relative
  • Buying a car
  • To fund a once-in-a-lifetime trip or holiday
  • To pay for a child's wedding
  • To pay off a loan.

You'll need to weigh up the benefits of having extra cash if you release equity against the costs of taking out a new mortgage, such as arrangement and legal fees, and the higher monthly repayments - you'll need to be sure this is an affordable option for you.

Crucially, you'll need to convince your lender that you'll be in a financial position to take on the extra debt on your home.

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