Remortgaging To Release Equity

What is equity in a home?

Equity in your home is the amount you own outright and is the difference between the value of your property and the balance remaining on your mortgage. For example, if your home is worth £300,000 and the mortgage balance is £100,000, the equity amount is £200,000. 

There are several ways to release parts of the equity in your home as a cash lump sum; remortgaging is generally regarded as the most popular way to do this. You can remortgage to release equity for a variety of reasons, such as: 

• For home improvements

• To consolidate all of your debts into one mortgage repayment

• To buy another property

• To buy a new car or a dream holiday

• To buy someone out of a mortgage

You can even remortgage to release equity on a house that is already mortgage-free. This is known as an unencumbered mortgage. 

How does remortgaging to release equity work?

When you remortgage to release equity, all you’re doing is borrowing more money on top of your existing mortgage. Let’s say your current mortgage balance is £150,000, and you want to release £20,000 of equity from your property worth £250,000. When you remortgage, you would need to borrow £170,000. 

You can remortgage to release equity with your existing mortgage lender (known as a product transfer), or you can move to another lender if the interest-rate deal being offered is better, meaning the repayments will be lower. 

Whether you choose to stay with the same lender or switch to a new one, because you’re borrowing more money, your repayments will increase. As a result, they will need to conduct new affordability assessments and check your credit history before approving your remortgage application. 

How much equity can you release when you remortgage?

This will vary from lender to lender. Some mortgage lenders will consider remortgage applications with an overall loan-to-value ratio (LTV) of up to 95%, including your existing mortgage balance plus the additional equity you want to release. 

So, for example, if your house is worth £200,000 and your existing mortgage balance is £100,000, the current LTV would be 50%. If a mortgage lender accepted your remortgage application and was now willing to let you borrow up to 95% LTV, this would mean the additional equity sum you could potentially release as cash is £90,000 (£100,000 + £90,000 = 95% of £200,000).

The amount of equity you’ll be able to release will depend on several factors, including: 

• Your current loan-to-value ratio (LTV). The lower your current LTV, the more equity you can release from your property. 

• The amount you want to borrow. If the maximum LTV available from any mortgage lender for a remortgage is 95%, the amount of equity you want to release must fit this requirement. 

• Your income and outgoings. A mortgage lender will want to know you can afford the new mortgage repayments, which will increase if you release equity. They do this by checking you have enough monthly disposable income to cover the new repayments after all outgoings have been taken into account. 

• Your credit history. Mortgage lenders will review your Credit Report before deciding how much you can borrow. A low credit score could reduce the number of lenders willing to consider your remortgage application and, ultimately, affect how much equity you can release. 

• Employment status. Mortgage lenders assess your income differently depending on if you’re employed or self-employed. If you’re self-employed with less than two to three years certified accounts available, this could affect the number of lenders willing to consider your remortgage application. 

• Your age. Some lenders may be more cautious about letting you remortgage to release equity if it means stretching the mortgage term beyond your retirement age. 

How long does it take to remortgage and release equity?

Remortgaging to release equity usually takes four to eight weeks. The time it takes will depend on the complexity and strength of your application. It won’t necessarily be quicker if you stay with your existing mortgage lender, as they still need to approve the extra borrowing. 

With the timescales in mind, it’s recommended that you start planning for your remortgage well before you need the additional money from the equity in your property. Give yourself between three and six months before your existing mortgage deal comes to an end—this will give you plenty of time to consider all of your options before you apply.

This is where we could help! Our team of Mortgage Experts has helped many people arrange their remortgages under similar circumstances. With their knowledge and assistance, you can identify the most suitable mortgage lenders for your particular needs. This will save you a lot of time and, potentially, some money, too. 

All you need to do is make an enquiry and a member of our Mortgage Team will contact you to get started.  

Is remortgaging to release equity a good idea?

This depends on your specific circumstances and why you need the money. Releasing equity from your home allows you to access large amounts of cash to use as you wish, but it also means you’re increasing your mortgage debt and repayments. 

There are benefits and potential downsides to releasing equity through remortgaging, all of which need to be carefully considered before proceeding. 

Benefits

• Gives you access to money previously tied up in your property without having to move home

• You can use the money as you wish, such as house renovations (which could further increase the value of your home) or to consolidate all your other debts into one easy-to-manage monthly mortgage repayment

• If your mortgage balance is relatively low, you could potentially release larger amounts of equity to make bigger purchases, such as a holiday home or buy-to-let property

Drawbacks

• Your mortgage repayments will increase and you may need to extend your mortgage term, meaning you could pay back more interest overall

• If you leave your existing mortgage deal before the term has ended, this could mean paying an early repayment charge (ERC) plus there may also be additional fees for your new mortgage deal

• If house prices fall this may leave you in a negative equity position, meaning you owe more on your mortgage than your property is worth

What are the alternatives?

If remortgaging isn’t a viable option, there are several other alternatives you can consider, such as: 

• Second charge mortgage**. If you’re unable to move from your existing mortgage deal, rather than paying a hefty fee for remortgaging, you could consider taking a second mortgage, again using the equity in your property.

• Personal loan or credit card. If the lump sums you need are relatively small, rather than remortgaging to release equity in your home, you could apply for either a personal loan or use a credit card with a preferential interest rate. Both these options would allow you to repay the debt over a shorter period, meaning you should pay less interest overall. 

• Cash savings. If you have enough cash in your account to cover the cost of the purchase you want to make, this option avoids repaying any interest and mortgage fees. 

**This service is offered by referral to a third party. 

Can I remortgage to release equity with bad credit?

If you’ve had bad credit since applying for your original mortgage, remortgaging to release equity could be a bit more complicated, but it is possible. This will depend on how much the bad credit has affected your credit score, when it happened, and the amount involved. 

Several mortgage lenders (all of which have strong working relationships with us) specialise in helping people with bad credit and assess applications case-by-case. You may have to pay a slightly higher interest rate and accept a lower loan-to-value (LTV). However, this may be worthwhile in the long run if the equity released allows you to make the purchase you need.