What is equity?
Your ‘equity’ in your home is the value of the portion of your home you own outright, as opposed to the portion you’re still paying back with your mortgage.
Let’s say your home is worth £300,000 and you have £200,000 of mortgage left to pay. That makes your equity £100,000.
Your equity can increase if either:
- The value of your property goes up, or
- You pay off more of your mortgage (while the value of your property stays the same or goes up)
Remortgage to borrow more money: how it works
If the value of your home has gone up, your equity has gone up, which means you could take out a bigger mortgage.
Say you start with a house worth £150,000 and a £100,000 mortgage.
5 years go by. Your house is now worth £200,000 and your mortgage is down to £80,000.
The amount you’ve paid off, and own outright, is £120,000. That means you now have £120,000 equity in your home.
You can now take part of that £120,000, and ‘sell it back to the bank’ so to speak. Adding it to your mortgage debt to pay back in the future, but getting a cash lump sum now.
This is why it’s called ‘releasing’ equity. The value in your home is effectively ‘locked up’ – you can’t spend it. But by borrowing more against your home, you release the value locked up in your property by turning it into cash you can actually spend.
(It’s called ‘liquidating your assets’ for the same reason.)
What could I spend my equity on?
When you approach a lender to remortgage, they’ll ask you what you’re planning to spend the money on. Things like working on your home, building an extension, and giving your kids some cash to get on the property ladder are OK by lenders. But usually, spending the money on investments or putting it in your savings isn’t.
Make sure it makes financial sense
Make sure it makes sense to remortgage – it won’t always be the right call. Here’s when it might not be a good idea.
What is Equity Release?
‘Equity Release’ is a type of mortgage for people who are 55 and over who’ve retired or stopped working and so don’t have the income to get a mortgage another way. With Equity Release mortgages, you borrow money against your home but you don’t pay it back during your life – eventually, your home goes back to the lender. Read more about Equity Release mortgages on Age UK.
You might also like: How remortgaging works (and the reasons you might remortgage)