Many homeowners remortgage with one goal in mind: to save money on their monthly mortgage payments.
But there’s another popular reason for switching your current mortgage deal to a new one (either with your existing lender or a different one): remortgaging to release the equity you’ve built up in your property. This means borrowing more against the value of your home and pocketing the extra cash.
Here, we explain everything you need to know about taking equity out of your home and whether it’s the right option for you.
What is equity?
Equity means how much of the property you actually own. So, if your home is worth £250k and your mortgage is £200k, your equity is £50k.
The amount of equity you own in your home will usually go up as you repay the mortgage, but it can also go up if your property jumps in value (yay!).
Finding out how much equity you own
There are a couple of ways to work out how much equity you currently have in your property:
- Research online. Punch your postcode into Rightmove, Zoopla, or the Land Registry to get a handle on what similar, nearby properties have sold for recently (ideally within the last six months). Remember, this is just a ballpark figure, but it’s a good jumping-off point.
- Ask a local estate agent. Quite a few estate agents offer a free valuation in the hope that you’ll use them to sell your property. You don’t have to tell them you’re actually staying put. That’ll be our little secret.
When you know how much your home is now worth, simply subtract your outstanding mortgage from the property’s new value to see how much equity you own.
How does remortgaging to release equity work?
Remortgaging to release equity is a pretty straightforward idea. Here’s how it works:
Let’s say you bought your home a few years ago for £180k. You put down a 10% deposit, meaning you had to borrow £162k.
Now, let’s assume that, in the time since you bought your property, you’ve paid down your mortgage to £150k, and the property’s value has shot up to £200k. This means – from day one until now – your equity has increased from £18k (your 10% deposit) to £50k (the £200k value minus the £150k mortgage).
If you were to simply remortgage, borrowing the £150k against the new value of £200k, your new loan-to-value ratio (LTV) would be 75%, down from the 90% you first borrowed.
Note: LTV is the size of the mortgage compared to the property’s value. You work it out by dividing the mortgage by the value. For example: (150 / 200) x 100 = 75%. The lower the LTV, the lower the interest rate, meaning cheaper repayments. Calculate your LTV with our mortgage repayment calculator.
However, you’re interested in taking equity out of the property, right? So, instead of borrowing £150k, you could remortgage for £160k, pushing your LTV up to 80%.
This will probably increase your monthly repayments (although they’d likely be cheaper than when you first bought your home), but you now have an extra £10k burning a hole in your pocket. Result!
So, why remortgage to release equity in your home?
There are a few reasons why you might remortgage and take the equity out of your home.
For starters, releasing equity for home improvements is a pretty popular way to fund that dream kitchen, loft conversion, or extension.
Using the cash you’ve built up in your property can offer an alternative to taking out a home improvement loan or sticking the bulk of the work on your credit card.
As another option, you could use that money to help a loved one get on the property ladder by gifting some of it towards their deposit. Or you could remortgage and free up some cash to pay school fees, medical expenses, or clear expensive debts.
Note: When you approach a lender to remortgage and release equity, they’ll ask what you’re planning to do with the money. The above reasons are A-OK, but investing the money in shares, a new business venture, or simply sticking it in your savings usually isn’t allowed.
Should I remortgage to pay off debts?
On the surface, consolidating your debt (lumping it all together into your mortgage) might seem like a good idea. After all, you’re moving high-interest debt, like credit cards or loans, into a low-interest, long-term mortgage, therefore spreading the cost. But it won’t always make sense.
Because you’re borrowing more and extending your repayment period, chances are you’ll be paying way more interest in the long run.
For example, let’s say you have debts of £10k and you remortgage with 4% interest over 20 years:
- In year one, you’d pay £393.93 in interest
- Over the 20 year term, you’d pay £4,543.52 in interest
Now, let’s say you take out a personal loan of £10k at a 15% interest rate over three years to repay your debt:
- In year one, you’d pay £1,309.29
- But by the end of the three years, your total interest payments would be (a far lower) £2,479.52
In short, so long as you can afford the larger monthly payments, a personal loan or credit card can be cheaper and quicker when it comes to clearing debt.
Plus, bundling your debt into your remortgage means moving unsecured debt to secured debt. If you can’t keep up with your higher mortgage repayments, you could put your home at risk.
What are the pros and cons of remortgaging to release equity?
The biggest plus point of taking equity out of your home is that you “unlock” the value you own tied up in your property and turn it into cash you can actually spend. That’s why it’s also known as “liquidating your assets”.
You can use this money for almost anything you like, from home improvements to debt repayment, school fees, or buying another property.
But, there are some downsides:
- Increased monthly payments. By borrowing more against the value of your home, you’re increasing the size of your loan, which could result in your monthly repayments going up.
- Risk of negative equity. You also need to watch out for falling house prices. If you borrow more and then the value of your property decreases, you could end up in negative equity. This is when your outstanding mortgage is actually higher than the value of your property. Being in negative equity can make it harder to remortgage or sell your home in the future.
- Early repayment charges. Depending on when you remortgage (before the end of your fixed term, for example), you could have to pay an early repayment charge (ERC) to switch to a new loan. An ERC is usually a percentage of the outstanding mortgage, which makes it quite a hefty fee. For instance, a 5% ERC on a £150k mortgage is £7.5k – and that could eat into the equity you’re trying to release.
Is an Equity Release mortgage the same as remortgaging to release equity?
Confusingly, no. “Equity Release” is a type of mortgage for those aged 55 and over who’ve retired or stopped working. Because they don’t have the income to get a mortgage another way, they can borrow against their home and take a lump sum of cash to cover living expenses. They then continue to live in their home until they move into permanent residential care or pass away. At that point, the property is sold, and the lender clears the outstanding mortgage.
Read more about Equity Release mortgages on Age UK.
Are you interested in remortgaging and taking equity out of your home? Speak to one of our friendly mortgage advisors to find out if it makes sense. Get started today.