Remortgaging to release eqiuity

What is equity and how can you use the money you have in your home to borrow cash for other purposes or to pay off debts?

Equity is the share you own of the value of your home. For example, if your home is worth £200,000 and your mortgage is £150,000, your equity is £50,000. 

What is equity and how do I know how much I have?

Equity is the value of your home you don't pay any mortgage on. This includes the amount of deposit you originally put in when you bought it. 

There are two ways your equity can increase:

In many cases you’ll have a combination of both.

You can work out how much equity you have by subtracting your remaining mortgage debt from the actual value of your home. 

Don’t forget that house values do fluctuate and, if you’ve had your home valued by your mortgage lender for borrowing purposes, the value might not be quite as high as estimates from property websites.

Why might I need to use equity in my home for borrowing?

It's not uncommon for homeowners to borrow against their equity by remortgaging for a higher amount to get a cash lump sum, often to pay for home improvements that can add value.

This is known as remortgaging to release equity, or remortgage equity release. If you want to remortgage to release equity you will need to contact your current mortgage lender or remortgage with a new lender to release the cash.

With mortgage rates relatively low, remortgaging may seem like the cheapest way to borrow large sums of money. But borrowing more means paying more interest over a relatively long period of time so it won’t always be a better idea than a short-term loan.

How to access your equity

The most obvious way to access your equity is by selling your home. Typically, your equity would be put towards a deposit to buy a new home but you could keep back some of the money to use for other purposes. 

Don’t forget that if you do sell your home you will have buying and selling costs as well as solicitor’s fees and removal costs to pay as well as the extra cost of taking on a bigger mortgage if you’re holding on to some of the equity. Make sure you weigh the pros and cons before taking this step.

Can I use the equity in my house as a deposit?

Yes, if your equity has increased, you can use it as larger deposit and secure lower mortgage rates, or maybe even buy a home outright.

If you 'downsize' and move into a lower value home, you can turn your equity into cash if there is some left over once you’ve bought your new home.

How to remortgage to release equity from your home

If you don't want to move home or downsize, you can remortgage to borrow against the value locked up in your equity by switching to a new lender or getting a new deal with your current one. This works by taking out a new mortgage that is larger than your existing mortgage.

If you owed £100,000 to your existing mortgage lender, but you get a new mortgage of £120,000, you would be left with £20,000 extra, although there could be various fees to pay that would eat into that (an arrangement fee to take out the new mortgage for instance).

By remortgaging for a higher value you would have 'sold' £20,000 of your equity, as you would now only own £80,000 of the £200,000 value of your home, rather than £100,000.

Because of the increase in the value of the home, your LTV has still dropped, giving you access to cheaper mortgage deals, but you're borrowing and paying interest on a higher amount. Just make sure you’ll be able to afford the higher repayments without overstretching yourself.

It’s best to wait until your current mortgage deal has ended before remortgaging to release equity as you usually have to pay early repayment charges to switch mortgage before this point. However, you may still be able to borrow more from your existing lender as a separate loan.

How much equity can I release?

In theory, you can release as much as will take you up to the maximum loan to value allowed. Mortgages are available that let you borrow up to 95% of your property’s value, which means that, based on the example above, you could increase your mortgage to £190,000 and release £90,000.

Whether you will actually be able to borrow this much depends on your financial situation as lenders have to make sure you can afford to pay back the loan before granting it to you. Your age and credit rating are other factors that will be taken into account. You should also think about whether you would be happy to pay the increase in your mortgage payments each month.

Bear in mind that the higher your loan to value the more expensive the mortgage is likely to be so don’t be tempted to release more equity than you really need to. The more you borrow, the more you’ll also end up paying in interest over the life of the loan. 

If you’re releasing the equity to make home improvements, the value it will add to your home could offset or even surpass the extra interest you’re paying so it’s important to accurately assess the amounts involved before deciding how much it’s worth increasing your mortgage by.

What will happen to my mortgage repayments?

If you’re borrowing more, your mortgage repayments will obviously increase although this would be offset if your new mortgage has a lower interest rate – because the market has changed or because you have a lower LTV than before for example. 

To illustrate what you might pay with different mortgage amounts, a £100,000 two-year fixed-rate mortgage on a £200,000 home with 20 years left to run could cost you from £471 a month remortgaging at current rates. If you borrowed £120,000 instead you would have to pay £565 a month – an extra £94. 

But if you increase your mortgage by another £70,000 to £190,000 your repayments would go up to a hefty £1,002 a month – an extra £531 compared with a £100,000 loan. Not only would you have to pay more because your mortgage amount has increased but you would have to get a more expensive deal because your LTV would have gone from 60% or less to 95%. 

You could lengthen your mortgage term to minimise the increase but you’ll be paying even more interest overall because you’ll be borrowing the money for longer. 

Things to consider before remortgaging for cash

Before you consider getting a larger mortgage, you need to weigh up the cost of remortgaging against the value of your equity.

Your equity - what to look at

The cost - what to look at

Alternative options for releasing equity

If your personal circumstances, high early repayment/arrangement fees or low equity growth mean remortgaging doesn't seem like a sensible option for getting a cash sum, there are a few other ways you can borrow.

Personal loan

A personal, or unsecured, loan will enable you to borrow amounts up to £50,000 over a period of between one and 10 years depending on the lender.

If you can afford to pay back the money within a year or two, a personal loan could work out cheaper than borrowing the money by remortgaging, but you may face some large monthly repayments.

As a personal loan is unsecured lending, you will need a good to excellent credit rating to borrow at headline rates.

Credit card

A credit card is a much more flexible way to borrow smaller sums up to about £5,000, although credit limits vary according to personal circumstances.

However, you shouldn’t use credit cards to borrow cash, only for credit. If you do use a credit card for cash, you will pay extra fees and interest from day one. But unlike loans or mortgages you can adjust the size of your repayments each month, provided you meet the minimum repayments.

A low APR card or 0% interest purchase card (provided you pay off the balance or transfer it elsewhere by the time the interest-free period expires) are typically the cheapest cards for borrowing.

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