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.
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:
The value of your home appreciates (your house or flat goes up in price)
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
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.
The value of your home was £350,000 when you first bought it. You put in a deposit of £35,000 and took out a mortgage of £315,000. You have made mortgage repayments worth £20,000 so your equity is currently £55,000. This leaves a remainder of £295,000 left to pay on your mortgage.
If the house price has also increased, say by £10,000, the equity would now stand at £65,000.
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.
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.
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.
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.
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.
For example: If the value of your home has increased from £150,000 to £200,000 since you took out your existing 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 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.
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.
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.
Before you consider getting a larger mortgage, you need to weigh up the cost of remortgaging against the value of your equity.
Work out the value of your home when you bought it minus how much of your mortgage you still owe. Your lender will be able to tell you your exact balance if you don’t already know it or how much you would have to pay to redeem your mortgage including early repayment charges if your initial deal hasn’t ended.
Add on how much your home has increased in value to work out how much equity you have. You won’t necessarily be able to increase your loan to value to the same as it was originally. 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 do the maths carefully but bear in mind that you're taking a risk. Just because property prices have gone up in the past, it doesn't mean they will continue to do so.
Look at the size of your current mortgage repayments and the size of your potential new repayments to 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 early repayment or exit fees from your current mortgage and arrangement fees for the new mortgage – if substantial they could eat into the equity you're releasing.
Consider 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 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.
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.
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.