What is equity and how can you borrow against it?
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.
How to access your equity - If you own any portion of your property you own equity, but how can you access it?
Borrowing against equity - If you own equity you can access it through remortgaging
Things to consider before remortgaging for cash - Before you remortgage you should consider the costs
Alternative options - Remortgaging isn't the only way to to access credit
Equity is what you own in your home – i.e. the value of your house that you don't pay any mortgage on. This includes the amount of deposit you originally put into the home when you purchased it.
There are two ways your equity can increase:
Appreciation of the value of your home (your house or flat goes up in price but the mortgage stays the same)
Your home value stays the same but you pay down (reduce) your mortgage debt with a repayment mortgage (but not an interest-only mortgage). In other words, you pay off the underlying mortgage debt in order to reduce the amount of money you're borrowing from the bank or building society.
You can work out how much equity you have by subtracting your remaining mortgage debt from the actual value of your home.
The value of your home was £350,000 when you first purchased it. You put in a deposit of £35,000, and have made mortgage repayments worth £20,000, your equity is currently £55,000. This leaves a remainder of £295,000 left to pay. If the house price has increased, say by £10,000, then the equity would now stand at £65,000.
Don’t forget that house values do fluctuate. If you were having your home valued by your mortgage company for borrowing purposes, the value might not be quite as high as estimates from property websites.
It's not uncommon for homeowners to borrow against their equity by remortgaging 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 company or remortgage with a new lender in order 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 overall, so is it a better idea than a short-term loan?
The most obvious way to access your equity is by selling your home. Typically, your equity is put towards a deposit to buy a new home.
Don’t forget that if you do this, you will have buying and selling costs as well as solicitor’s fees and removal costs. So make sure you weigh up the pros and cons before taking this step.
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 will have freed up your equity into cash.
If you don't want to move home or downsize, you can remortgage to borrow against the value contained in your equity. This works by taking out a new mortgage that is larger than your existing mortgage.
For example, if the value of your home has increased from £150,000 to £200,000 since you took out your old mortgage, remortgaging enables you to cash-in on this increase in value without moving.
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 are various fees that will eat into that (the arrangement fee of 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 value £200,000 of your home, rather than £100,000.
Because of the increase in value of the home, your loan to value ratio (LTV) has still dropped, but you're borrowing and paying interest on a higher amount.
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
Work out the value of your home against how much of your mortgage you still owe. Your lender should do this for you, but will often charge fees, so it's worth getting some estimates yourself before you commit.
Look at how much your home has increased in value, and make a point of not increasing your loan-to-value ratio by borrowing proportionally with how much your property has increased in value. Fundamentally it's still about what you can afford to pay back. Mortgage lenders have had to be quite strict about how much they lend to borrowers, and have to make an assessment based on affordability criteria. So you may not be allowed to borrow quite as much as you would like or hope to.
If you plan for your home to further increase in value to negate increasing the size of your mortgage, you're taking a risk. Just because property prices have gone up in the past, doesn't mean they will continue to do so.
The cost - what to look at
Look at the size of your current mortgage repayments and the size of your potential new repayments, see if you're happy with larger monthly outgoings.
Work out the total cost of the new bigger mortgage, and see how much more interest you will pay over the lifetime of your debt.
Take into account any exit fees from your current mortgage and arrangement fees for the new mortgage - if substantial they could eat into the equity you're releasing.
The cost of currently available mortgage rates - the price of mortgages goes up and down. Getting a new mortgage rate at the right time, could mean your mortgage will cost you less. Conversely if rates go up, your monthly payments could increase substantially.
If your personal circumstances, high exit/arrangement fees, or low equity growth mean remortgaging doesn't seem like a sensible option to get a cash sum, there are a few other ways you can borrow.
A personal, or unsecured, loan will enable you to borrow amounts up to £35,000 over a time period between one and five years.
If you can afford to pay back the money within a year or two, a personal loan could work out cheaper than borrowing money by remortgaging, but you may face some large monthly repayments.
Because a personal loan is unsecured lending offered against your credit score, you will need a good to excellent credit to borrow at headline rates.
A credit card is a much more flexible way to borrow smaller sums up to about £5,000 - but credit limits vary with personal circumstances.
However, you can't use most credit cards to borrow cash, only for credit. If you do use a credit card for cash, you will pay extra fees and possibly a higher interest rate.
But unlike loans or mortgages you can adjust the size of your repayments each month, provided you meet the minimum repayments.