Most homeowners who remortgage their house do so to lower their interest rate and their monthly mortgage payments. However, some people remortgage to release part of the equity they have built up in their homes, especially if they have paid off a large portion of their mortgage or if the value of their home has grown.
When you remortgage to release equity, you obtain access to a lump sum of cash. This money can be used for a variety of purposes, including paying for your children’s schooling or assisting grown-up children to get on the property ladder, home upgrades on your own property, paying off short-term obligations, or taking a trip of a lifetime. However, it is not without flaws. This article will define remortgaging to release equity, why and how you might use it, and what to avoid.
What is Equity?
The term “equity” refers to how much of the property you own outright. So, if you bought a home with 10% down equity, you would own 10% of the property. Typically, when you repay the mortgage, your equity in the home increases since the existing debt represents a decreasing fraction of the overall worth of the property.
While you may have had a mortgage at 90 percent loan-to-value when purchasing the house, that figure may have dropped to 88 percent a year later, implying that your equity has improved from 10% to 12%. However, that isn’t the only way your equity can grow; it will also grow if the property’s worth rises.
What Percentage of My Equity Do I Own?
You may get an estimate of how much your house is worth by looking at what similar houses in your neighbourhood have sold for on the Land Registry. You might also ask an estate agent to come over and give you an estimate. Most do this as a free service in the hopes that you will use them to sell your property if and when you decide to do it. To determine how much equity you have, simply deduct the outstanding mortgage from the property’s worth. Your annual mortgage statement will show how much you still owe, and you can contact your lender at any time for a more current amount.
How Does Remortgage to Release Equity Work?
When you remortgage to release equity, you ask the lender to add the amount you wish to release to your existing mortgage loan.
Assume you own a property worth £300,000 and have a £200,000 mortgage. To raise £20,000, you would request a remortgage for £220,000 instead of £200,000.
You can remortgage with your current provider, which is known as a product transfer, or with a different lender. You may get the best remortgage rates by using comparison sites or a broker, but you should also look into what your current supplier has to offer.
Before proceeding, consider other fees in addition to the interest rate and monthly payment. These may include early repayment or exit fees for leaving your present arrangement, as well as solicitor and setup expenses for the new agreement.
What are the Reasons for Remortgage to Release Up Equity?
#1. Home Enhancements
If you like where you live and want to renovate but don’t have the money, remortgage could be the solution.
#2. For Grandchildren or Children
Releasing equity through remortgaging allows you to gift money to your children or grandkids today rather than waiting until you die. The money is frequently used to pay for private school or further education tuition or to help them get on the property ladder. Many first-time purchasers increasingly rely on family members for assistance. This may also assist in lowering inheritance tax expenses.
#3. Increase your Retirement Income
If you have a small pension plan, remortgaging could provide you with a cash buffer for later life. For elderly homeowners, equity release, which is different from normal remortgaging – is also an option.
#4. Pay off your short-term loans first.
Using the money to free yourself from monthly loans or overdraft repayments, which have a higher interest rate than the rate for releasing equity from your property, could be a wise decision.
#5. Establishing a business
Obtaining a loan to finance a new business can be difficult since there is a lot of paperwork to fill out and a business plan to present to the bank before you are approved for money. Borrowing money by releasing equity may be an easier way to get money, and the rates are usually lower than for a company loan, but you must think carefully before doing so. If your business isn’t as profitable as you thought, you’ll still have to repay the loan or risk losing your house.
#6. To have fun
It doesn’t have to be all about the practicalities. You can also use the money to have fun, such as taking a once-in-a-lifetime vacation, purchasing a nicer car, or starting new hobbies.
How Long Does It Take To Remortgage And Release Equity?
According to Barclays, the average remortgage takes between four and eight weeks, depending on how well-prepared you are and the efficiency of the mortgage lender (and its solicitor). The process will be sped up if you have all of your papers organised and the information necessary for the lender available.
How much Equity can I Release from Remortgage?
The amount of equity you can release depends on a number of variables, including your age, the value of your home, the remaining mortgage term, and your equity balance. Lenders will be increasingly hesitant to lend to older borrowers.
Your income, affordability, and credit rating will also be considered.
To figure out how much more you may borrow, use online remortgage calculators, which are available on the websites of numerous lenders and brokers. It may be worthwhile to consult with a broker for a more complete perspective.
What will Become of my Mortgage Payments?
Your monthly payments will increase when you increase your mortgage (unless you also extend your mortgage term). However, if you can remortgage at a lower interest rate, you can mitigate the blow.
The loan-to-value (LTV) of your new mortgage will be what determines your interest rate. This is a percentage that expresses the value of the mortgage in relation to the value of the property. The lower the LTV, the lower the interest rate.
Assume you have 30% equity in your home. This would allow you to remortgage into a loan with a 70 percent LTV; however, if you released equity and the LTV increased to 80 percent, you will most certainly pay higher interest rates.
If, on the other hand, you have more equity in your property and releasing equity has no substantial influence on the LTV, your interest rate will not necessarily rise.
The lowest interest rates are often available to customers with a loan-to-value ratio (LTV) of 60-65 percent.
What if I have a Poor Credit History?
It’s also worth remembering that if you have bad credit or your credit has deteriorated since you took out your mortgage, you may be ineligible for the best remortgage options.
You may still be eligible to remortgage, but at a higher interest rate.
In these cases, it may be worthwhile to consult with an independent mortgage broker about your options, as well as whether more borrowing is prudent.
The Benefits and Drawbacks of Remortgage to Release Equity
Pros:
- It is simple and straightforward to link new borrowing to your mortgage.
- You can raise funds for a wide range of purposes.
Cons:
- You are raising the amount owed on your mortgage.
- There could be less expensive ways to borrow.
- If your credit score has deteriorated or you are increasing the LTV of your mortgage, your mortgage rate may climb.
- When you pay off your old mortgage, you may have to incur early repayment penalties.
- If you fall behind on your payments, your home will be in jeopardy.
Eligibility for Remortgage in order to Release up Capital
If you want to remortgage your home to raise funds, you will be evaluated based on the following aspects:
- How much equity do you have? (the more, the better.)
- What is your age? (some lenders are unwilling to deal with applicants over 75, but others will stretch to 85, and a minority imposes no age limits at all.)
- Income and employment status (the lender must guarantee that the new loan is affordable and that the income type is acceptable to them; each lender differs in terms of what they would accept and how generous they are with their lending calculations).
- History of credit (a clean credit history always helps, but some remortgage providers specialise in customers with credit problems)
- If the remortgage is classified as a large loan (there are frequently separate regulations for loans over £500,000–750,000, up to millions),
- The type of property and its age
How much Extra Money Can I Get?
How closely you meet the lenders’ remortgage eligibility requirements will determine the additional amount you can borrow when remortgaging to release equity.
Lending criteria differ from one supplier to the next, but the two key considerations are:
- Your income and ability to pay
- The goal of the new money
What are the Risks of Remortgage to Release up Equity?
Speak with a mortgage broker, and possibly a financial adviser, before remortgaging to release equity because there are a number of dangers to consider, the most important of which is that you are taking on more mortgage debt. If you receive many rejection letters from lenders, your credit score may also suffer, making it more challenging for you to get credit in the future or increasing the cost of borrowing money.
Another risk is that there is no guarantee that house values will continue to climb, and you may be left with negative equity if prices fall dramatically. This is when your loan exceeds the value of your house, and you may find it difficult to relocate or remortgage in the future if this is the case.
There are a lot of fees and charges to consider as well. Some mortgage providers demand significant exit costs if you opt to switch from your current mortgage to a new one before the current one expires. Remortgaging during an initial fixed or tracker period may result in early repayment charges (ERCs), which are calculated as a percentage of your outstanding mortgage and typically range between 1% and 5%. While this may not appear to be much, 1 percent on a £150,000 loan is £1,500, and 5 percent would deduct £7,500 from the equity you could release by remortgaging.
Read Also: BUY TO SELL MORTGAGE: Rates And Comparisons
An ERC is normally not levied if you have been switched to a lender’s basic variable mortgage rate. It is, however, not the only charge to consider. When you close an account, you may be charged an administration cost of around £100, however, when you apply for a mortgage, you may be charged a product or arrangement fee of around £1,000. This can be added to your mortgage, but you will be charged interest on it, making it more expensive in the long run. You may also be required to pay any legal fees associated with the remortgage.
Alternatives to Remortgage to Release Equity
There are alternatives to remortgaging to release equity if you do not believe it is right for you or if you are an older homeowner and your lender will not allow you to remortgage:
#1. Loan for personal use
While the interest rate is higher than remortgaging, you will pay it off in a much shorter time, perhaps saving money in the long run. The most you may borrow (depending on your credit score and other circumstances) is between £25,000 and £50,000, which you would repay over a one- to seven-year period. Check with your own bank first, as they typically provide the best rates to existing customers. Before agreeing to a significant loan, make certain that you will be able to repay it.
#2. Mortgage that is co-signed
Some lenders provide joint mortgage plans that take into account the income of both applicants—that is, you and your child or grandchild—for individuals wishing to help their children or grandchildren get on the property ladder. This way, you’ll be able to borrow more. You might also consider a guarantor loan, in which you promise to step in if they are unable to make the repayments, but keep in mind that the final burden will lie on you in both cases.
#3. The credit card
While the interest rate on a mortgage is often lower than the rate on a credit card, you might use a 0% money-transfer credit card instead, especially if the amounts you require are relatively small. These cards allow you to make interest-free payments for a certain period of time. Be aware that once the grace period expires, you will be subject to a considerably higher interest rate, so be sure you can pay the money back or readily switch to a balance transfer card, although there is generally a fee for doing so.
#4. Release of Equity
This is not the same as remortgaging and is usually only available to homeowners over the age of 55. There are two types of equity release products. A lifelong mortgage is a loan secured by the property’s worth that allows you to continue living in your home; the loan is repaid when you die or move into long-term care. With a home reversion plan, you sell a portion or all of your home to an equity release provider while continuing to live in it. The Financial Conduct Authority, the financial services regulator, authorises and regulates equity release businesses. Read our Guide to Equity Release for more information.
#5. Downsizing
If you remortgage to release equity, you can stay in your house, but you may want to consider downsizing or relocating to a cheaper area to free up cash—but you must consider the expense of moving. Renting out a room in your home to a tenant may also be a viable alternative for raising income.
Related Articles
