If you’ve owned a home for a good few years now and kept up with your mortgage repayments, chances are you’ve built up a fair amount of equity. This could be quite a substantial gain too, given the steady rise in UK property values.
If this applies to you, then remortgaging may be on your mind as it means you can free up this equity and turn it into cash. However, the process of remortgaging to release equity isn’t always as straightforward as it seems on the surface, mainly because there are several factors to weigh up.
To guide you through, we’ve put together this guide which covers everything you need to know and consider before coming to a decision.
Table of Contents
What is Equity and How Do I Know How Much I Have?
Equity is that portion of your property which you truly own, i.e., the difference between your home’s market value and the balance left over to pay on your mortgage.
A few different influences determine how much equity you have. The size of your deposit plays the initial role in that putting down a larger sum when purchasing your home means you start with more equity from the outset. Moreover, fluctuations in the property market impact your equity. Specifically, if your home increases in value over time, so does the amount of equity you hold.
What is LTV and How Does it Affect Borrowing?
With equity, it’s also important to know that lenders look at it directly in relation to your loan-to-value (LTV) ratio, which is the percentage of your property’s value covered by your mortgage. A lower LTV ratio means you own more of your home outright, in turn, resulting in better mortgage rates.
Let’s say that your property is worth £250,000 and you have £100,000 left to repay on your mortgage, implying your equity would be £150,000. In this instance, your LTV ratio would be 40% (worked out by dividing your remaining mortgage by the property’s value), meaning you own 60% equity.
Can You Remortgage Your Home to Release Equity?
Yes you can release the equity you own in your home, but you’ll undergo the same scrutiny as if you were making a standard mortgage application. As such, lenders will carry out an affordability check, review your credit history, and assess your overall finances all over again. They’ll also consider how much equity you want to release and the reason for it, in order to ensure that your reasons are in line with their criteria.
How Much Equity Can I Release?
The exact amount of equity you’ll be able to release is primarily dependent upon your affordability and how much equity you actually have. Though, as a rule, lenders will let you release up to between 75% to 85% of your house’s value. But, remember, a higher LTV equates to a worse interest rate.
Why Release Equity from Your Home?
Releasing home equity is a popular choice for homeowners due to its versatility, particularly by how the money could be used for:
- Home improvements like renovations, needed repairs, or additions such as a conservatory
- Significant costs such as university fees or a new car
- Purchasing a second property, whether in the UK or abroad, or a buy-to-let property
- Debt consolidation to manage multiple debts with a single repayment plan
How Remortgaging to Release Equity Works
With a remortgage to release equity, what you’re doing is increasing your existing loan to unlock value that’s tied up in your home. This therefore entails approaching either your current lender or a new one to apply for a larger mortgage.
The extra funds you’ve borrowed then replace part of your existing loan so that you are able to access the equity as cash. Using the previous example again, if your home is worth £250,000 and you still owe £100,000, you might choose to remortgage for £150,000, therefore releasing £50,000 in the process.
Pros and Cons of Remortgaging to Release Equity
As we’ve established, whether you should remortgage to release equity really depends on if the pros outweigh the cons in your specific case. Here’s a general outline:
Advantages:
- Unlocks cash which would otherwise be tied up in your property
- Gives flexibility regarding how the money is used, whether for home improvements or necessary expenses
- If you have sizeable equity built up, remortgaging may not drastically impact your LTV ratio
- A lower LTV could help you secure a more competitive interest rate
- The opportunity to release more in future if property values continue upwards
Disadvantages:
- Higher monthly repayments since you’re borrowing more
- You’ll pay more interested over time by extending your mortgage term
- Risk of repossession if you struggle to meet new repayments
- Early repayment charge (ERC) if you exit your current mortgage early
- You could go into negative equity if property prices drop
What are the Alternatives?
Of course, equity release isn’t the only option if you plan on a big expense. If you own your property outright, an unencumbered mortgage is a way of raising funds. You could also get a further advance from your current lender, which avoids ERCs. For those who need a quicker injection of cash, short-term borrowing such as a personal loan or even a credit card may be suitable, provided you can clear the balance fast.
How to Remortgage to Release Equity
- Assess lender options: Figure out whether your current lender or a new one has better terms.
- Check your affordability: Look at your income and expenses to ensure you can manage the new repayments.
- Undergo Lender Checks: Be prepared for a credit score check by not taking any big loans out and making sure there are no errors.
- Decide what you want the money for: Lenders will invariably look how much equity you wish to access and whether your reason is justified.
- Choose the right LTV ratio: The higher your LTV, the less chance you have of acceptance.
- Property valuation and legal processes: If approved, the lender will arrange a property valuation and carry out the necessary legal steps.
- Receive your funds: Once everything is finalised, the funds will be transferred to your account.
Get Remortgaging Advice
Deciding to remortgage and release equity from your home is a significant financial move, one that requires careful thought. Increasing your mortgage means higher repayments, and if these become unmanageable, your home could be at risk.
To ensure you’re making the right choice, it’s important to explore all available options and seek expert advice. Our intuitive online platform allows you to compare remortgage deals across the UK with daily updates on the most competitive rates.
Once you’ve identified a suitable deal, our team of specialists is on hand to offer tailored support. We take the time to understand your financial situation and long-term goals, helping you select the best option for your needs.
If you’re unsure or need guidance, don’t hesitate to reach out. We’re here to simplify the process, eliminate confusion, and help you secure a remortgage deal which aligns with your financial future.
Remortgaging to release equity FAQs
In theory, you can remortgage at any time, but if your goal is to release equity, most lenders require you to have owned the property for at least six months. While you might be eligible to release equity after just six months, it’s often wiser to wait. The longer you own the property and pay down your mortgage, the larger the sum you’ll have in reserve.
Remortgaging to release equity usually takes between four to eight weeks. This timeframe covers everything from the beginning of your application to being finally approved and having the funds released.
Yes, a lot of landlords remortgage their properties as a way of funding further rental properties to grow a portfolio. Not to mention, as opposed to borrowing against your home, this carries less personal risk since it’s not being used as security.