There are various reasons to remortgage your home, which are usually aimed at either saving or accessing money. Many people decide to remortgage to borrow more, but how does this work in practice and what’s involved?
Can I remortgage my home to release equity?
Once you have a mortgage in place and have paid off some of the debt, you may be able to remortgage to increase the size of your loan. This will release cashback to you, to spend however you wish.
There are a few things to consider and you will need to meet certain criteria to take advantage of this option.
How does remortgaging to release equity work?
The first thing you will need to access your equity is an idea of your Loan to Value (LTV). This is the size of your loan against the value of your property. The difference between these figures is your equity.
Work out how much you want to borrow and the new size of the LTV if you increase the loan. You can get a mortgage right up to 95% LTV – but you will need an excellent credit score to achieve this and your interest rates will be high.
If you can find a mortgage lender to accept you, you take out a new mortgage for the higher sum. You pay off your previous mortgage and keep the leftover funds.
Imagine you bought a property that was worth £300,000 five years ago. The mortgage you owe is now worth £200,000, and property price rises mean your home is now valued at £350,000. This makes your equity now £150,000.
You could take out a new mortgage for £250,000, releasing £50,000 back as a cash sum. Your mortgage payments will increase, but you still have £100,000 equity in the home.
When might be a good time to remortgage to release equity?
As long as you have sufficient equity, you can use the money when and how you like. Typical reasons to release equity include:
- Home improvements – Many people extend their mortgage debt to fund an extension, loft conversion or other home renovation projects.
- Boosting retirement funds – You could release equity to boost your future pension pot. If you’re over 55 you could also look into a Lifetime Mortgage, which is a dedicated product to release money from your home.
- Supporting your family – Some people choose to release equity to give to children or other family members, perhaps to fund education or a property deposit. It could possibly also help reduce Inheritance Tax liability.
How much could I borrow?
The amount you can borrow will depend on the amount of equity in your home, and how much you can comfortably afford in monthly repayments. Talk to a mortgage broker or use a mortgage calculator to explore your options. The next step is finding a mortgage deal that suits you.
Are there any drawbacks to remortgaging to release equity?
The biggest drawback is that you are increasing your overall mortgage debt. There is also a bigger risk that if house prices fall, you enter negative equity – which makes it hard to move or remortgage your home.
It can also be costly – there will be valuation fees, arrangement fees and legal fees.
One important consideration is whether early repayment charges apply to your existing mortgage. These exit fees are common on a fixed rate deal and can be as much as 15% of the outstanding mortgage. If early repayment fees apply, it is usually worth waiting until your fixed term ends before remortgaging.
How can a Mortgage Broker help?
Generally, mortgages are a highly cost-effective way to borrow money. But everyone’s situation is different, so it’s important to explore all the options carefully before making a decision.
A broker like The Mortgage Store has vast experience in remortgaging, the property market and accessing equity. We will talk through your plans and the pros and cons of releasing equity.
We then explore all the available deals and lenders to recommend the most appropriate products. If there are other options that may work better for you, we’ll suggest them too.
Your property may be repossessed if you do not keep up with your mortgage repayments.