By remortgaging, you may be able to access some cash against your home. This is known as equity. It’s the difference between your home’s current value and the amount owed on your mortgage.
Over time, you may find that the value of your property has increased as property prices go up, or following some home improvements you may have carried out. At the same time, you may have paid down your mortgage borrowing. Either of these events will result in an increase in the amount of equity available in your home. Combined, they can have quite a significant impact on the amount of it.
If you release some of the equity in your property, you can generally use the cash generated for any purpose you like. Perhaps you’d like to put it towards some planned home improvements, a new car, or a wedding? Maybe you want to pay off debt or to offer some financial help to loved ones. So, how do you go about releasing equity from your home, and what are the pros and cons?
What is equity in property?
Firstly, let’s explain a little more about equity. Equity refers to how much of your property’s value actually belongs to you. It is the difference between your house value and any mortgage borrowing you may have against it.
For example, if the current market value of your house is say £300,000 and you owe £200,000 on your mortgage, then you have £100,000 of equity available in the property. You can usually only access this equity by selling your property. However, you may also be able to access some of it by borrowing against it via remortgaging.
Often, the equity in your property will have increased as a windfall following a general increase in property values locally or nationally. But remember, property values can go down as well as up. The property you bought ten years ago for £200,000 may now be worth £280,000, increasing your equity by £80,000.
If at the same time, you have paid down your mortgage from, say, £180,000 to £130,000, then you have added a further £50,000 to your equity. Combined with the increase in value, this gives growth in equity of £130,000. Add this to your initial £20,000 cash deposit when you purchased your house, and it gives you total equity of £150,000.
A local estate agent will often provide you with an indication of the current market value of your home for free. In addition, your mortgage lender will also be able to confirm the amount outstanding on your mortgage at any time.
The difference between these two figures will then give you a good idea of how much equity you have available in your home – some of which you might be able to access.
Remortgaging to release equity
To explain how you can remortgage to release equity, let’s use the above case as an example. We have assumed that you bought your property for £200,000 with a £180,000 mortgage ten years ago. Since then, the amount you owe on your mortgage has fallen to £130,000. The value of your property has increased to £280,000. As a result, the equity you own in the property has increased from £20,000 at the time of purchase, to £150,000 now, (the difference between £280,000 – £130,000 = £150,000)
Generally, when people remortgage, it is to secure a better or cheaper mortgage deal. In this case, you would look to borrow £130,000 (the amount outstanding on your current mortgage), against your property currently valued at £280,000. This gives a proposed loan to value (LTV) of around 47%. This LTV is particularly beneficial, as the lower the LTV, the lower the interest rates that are usually offered by mortgage lenders. This means cheaper monthly repayments.
However, if you are looking to release some of the equity in your property at the same time, you would need to remortgage for a larger amount than you currently owe, so that there is surplus cash available to be released to you. In order to release £30,000 in equity, you would need to remortgage for £160,000. This takes your LTV up to 57%, however, this is still quite low.
It is adding £30,000 to your current mortgage, (from the example above, £130,000 owed to the lender adding on £30,000, making your new debt £160,0000). This would mean the equity in your house would reduce from £150,000 down to £120,000, (£280,000 – £160,000 = £120,000 equity). Of course, this is not ‘free cash’. You have added it to your mortgage, so will be paying it back over the remaining term of your loan.
Interestingly, your monthly repayments may not necessarily increase by much if you manage to secure a remortgage deal at a better interest rate than you were previously on, and/or if you extend the mortgage term by a few extra years.
Remortgaging to release equity to buy another property
There are a number of reasons why you may want to release equity to buy another property. You may wish to:
- Purchase a buy-to-let property as an investment
- Purchase a holiday let as an investment or for personal use
- Purchase an investment property to renovate and sell on
- Purchase a commercial property for your own use or as an investment
- Or purchase a second residential property for the use of a family member
To buy a second home, for whatever reason, most people will need to raise a large amount of cash. This is to either purchase the property outright or to provide a significant deposit to go alongside an additional mortgage. One solution to raising this cash might be to remortgage your current residential property. This can release some of the equity you have available.
Perhaps you are looking to buy and rent out an investment property with the assistance of an additional mortgage. You will need a specialist buy-to-let mortgage, as the purpose of the transaction is to obtain a rental income, and the mortgage product is assessed differently.
It is important to note that a typical deposit for a buy-to-let mortgage is a minimum of 25%, so you will need to ensure that you can raise this deposit, as well as cover the cost of the repayments on the new mortgage, plus meet the additional cost for purchasing the investment.
Should I remortgage to release equity?
Whether or not you should remortgage to release equity will depend on your individual circumstances. If you have enough equity built up, remortgaging to release it can be a good way of putting it to use.
However, don’t lose sight of the fact that you are increasing the size of your mortgage to do so. Your monthly repayments may increase as a result. In addition, it might also take longer to fully repay your mortgage if you have extended the loan term to make borrowing more affordable.
Remortgaging to release equity is essentially just another way of borrowing money. You should only do it if you have a good amount of equity built up in your property. You should also be fully satisfied that you can afford the new monthly repayments.
Also, remember that there are some upfront costs to remortgaging. These include valuation charges, legal fees and mortgage arrangement fees. With these in mind, it may not be worth doing an equity release to raise just a small amount of cash. There will almost certainly be more cost-effective ways to borrow small amounts of money.
You need to also be aware of any potential early repayment charges when remortgaging. These generally only occur when your current mortgage deal is still in its initial preferential fixed term. An early repayment charge is normally calculated as a percentage of the outstanding loan amount, so can be quite a significant sum.
Early repayment charges will eat into the equity you want to release by remortgaging. It’s generally advisable to wait for your fixed term to end before remortgaging. Some lenders may also seek to charge an exit fee to get out of an existing mortgage deal. This is usually a smaller sum of around £100.
If you are unsure whether you should remortgage to release equity, speak to a qualified mortgage advisor and broker that you trust, such as us here at Mortgage Light. We’ll take a look at your financial situation and your remortgaging options, and help you decide what is best.
Why not contact us for a chat? Just call 01908 597655 or contact us via our website.