The equity within your property tends to increase over time as your mortgage payments reduce your mortgage balance and general house price increases make your home more valuable. Using the equity in your home can be an attractive way to fund other financial needs that arise and there are ways to access it without selling your home.
In this article, we explain how you can borrow more money on your mortgage through remortgaging to release equity that has built up in your home. We will explain how remortgaging to release equity works as well as the pros and cons of remortgaging to access the equity so that you can work out if remortgaging your home is right for you.
How does remortgaging to release equity work?
Remortgaging is the process of arranging a new mortgage loan to take over your old one. A new mortgage loan will be raised and used to repay the original mortgage - if the new mortgage amount that you apply for is larger than the original mortgage balance, the extra money can be paid to you as equity.
Most homeowners with a mortgage will choose to remortgage at the end of a fixed mortgage deal such as a 2-year or 5-year fixed rate deal to secure a better rate of interest. If you do not remortgage, your mortgage lender will normally switch your mortgage interest rate to its standard variable rate (SVR) at the end of a fixed deal period and the SVR is usually a higher rate than the one that you were previously paying.
Remortgaging allows you to start a new mortgage with your existing lender or a new one, choosing an interest rate that is usually more competitive than moving onto the lender's standard variable rate.
Remortgaging can be completed in a matter of a week or two if you choose to stay with your existing lender as it already holds your financial information and details of your property. If you choose to remortgage with a new lender, on the other hand, it can take between 4 to 8 weeks to complete as a new application will be needed and you will usually have to go through affordability checks and conveyancing as well as a property valuation.
How to remortgage to release equity
The steps to remortgaging to release the equity in your home are similar to those you will have followed when you completed your original mortgage application but the process can vary from one lender to another and will usually be simpler if you remortgage with your existing mortgage lender.
What is equity in your home?
Equity is the value of your home that you own outright so it belongs to you. The amount of equity is the value of your home minus the amount that you owe your mortgage lender which is your outstanding mortgage balance. In other words, if you were to sell your property and repay your mortgage, the equity is the money that you would be left over with.
You will need to know how much your property is currently worth so that you can decipher how much equity you have.
Equity calculation example
|Value of your home||£350,000|
|Amount required to repay your mortgage||£150,000|
|Amount of equity||£350,000 - £150,000 = £200,000|
If you have secured any other loans against your home then you should add these to the outstanding balance of your mortgage and deduct the total from your house value to find out how much equity you own.
You can estimate the value of your home by using the Zoopla home valuation tool which uses data from recent sales in your area to estimate the value of your home. Or you can use Rightmove's valuation tool which sends your request for a valuation to local estate agents, inviting them to visit your home for a more accurate appraisal.
How much equity can I release from my home?
Once you know the amount of equity you have in your home, you can start to consider how much of this you wish to release when you remortgage. The amount of your new mortgage will be the amount you need in order to repay your current mortgage balance in addition to the money you want to release. It is worth pointing out that most mortgage lenders do not offer to lend more than 95% of the value of a property and borrowing close to this amount may put you at risk of falling into negative equity if house prices fall by more than 5%. Negative equity is when your house is worth less than what you owe against your mortgage.
A key consideration when you work out how much to borrow is the loan-to-value (LTV) ratio. The LTV is the percentage calculated when you divide the amount of the mortgage loan by the value of the property - usually the lower the LTV, the better the rate of interest you will be able to get on your mortgage. Increasing your mortgage amount will allow you to access the equity in your home but it will also increase the LTV potentially limiting your ability to get a competitive mortgage interest rate for your remortgage.
Also, you will need to ascertain whether your original mortgage contract includes an Early Repayment Charge that will be charged if you come out of the contract before the agreed date that your mortgage deal ends. Sometimes it can be beneficial to wait for your mortgage deal to end before you remortgage but this will depend on your personal financial circumstances and the early repayment charge amount. You can find useful information in our article, "When is it worth paying an early repayment charge to remortgage early?".
Prepare for a remortgage application
You'll need to get some things in order to ensure that your remortgage application goes through smoothly and has the best chance of being accepted. Here is a list of tasks to get you ready for your remortgage application:
- Paperwork - collate your bank statements, payslips (last 3 months) or self-employed accounts (last 3 years), existing mortgage contract & identification documents
- Credit report - check your credit report for any missed payments and ensure that any mistakes are corrected
- Valuation - if you've had a valuation carried out then this can be useful but the lender may carry out their own
Source a remortgage deal
Making your selection carefully is very important as declined remortgage applications are likely to affect your credit score and in turn, your ability to qualify for another remortgage. The mortgage market is complex and finding the best deal for what you need can be tricky and so you should consider speaking to a specialist independent mortgage broker*.
Complete remortgage application
Once you complete your paper or online remortgage application it is over to the lender and you can sit back and wait for the outcome.
Reasons for remortgaging to release equity
The key reason to remortgage to release equity is to access the money that is tied up in your home's value. Reasons for remortgaging to raise funds can range from paying for home improvements to helping someone with a cash lump sum or simply consolidating your debts. Here's a list of common reasons why people choose to remortgage to release the equity in their homes:
- Pay for home improvements
- Provide a deposit for a second home
- Provide a cash sum to a child getting started in life
- Buy a new car
- Consolidate debts
- Pay for a holiday
- Pay university or school fees
- Supplement income shortfall
While there are alternative ways to raise capital through a personal loan, a credit card or borrowing money from your friends and family, remortgaging can have some advantages which we explain further in the article.
Pros and cons of remortgaging to release equity
- The rate of interest may be lower than other credit options such as a credit card or personal loan
- You can spread the cost of your borrowing over a longer period
- You can use the money from the equity in many different ways
- Your monthly mortgage payment amount may increase
- You may be able to source a cheaper way to raise the funds you need
- It may take you longer to pay off your mortgage if you extend the mortgage term
- You may not qualify for the best mortgage interest rate due to your LTV being higher
- You may risk losing your home if you're unable to keep up with the monthly repayments
Alternatives to remortgaging to release equity
Borrowing against your house means that your home is at risk if you are unable to keep up with the monthly repayments. The following are alternatives ways to raise funds if you would prefer not to remortgage your home:
- Credit card
- Personal loan
- Sell other assets
- Borrow from family or friends
- Apply for funding/grant
- Move home and downsize to raise funds
You can also refer to our article, "50 ways to make extra money online & offline" which provides ideas for raising extra cash that could help you avoid the need to raise extra money through a remortgage.
Choosing the right mortgage provider when remortgaging to release equity
Arranging your remortgage to release equity from your home can be simple and straightforward but you may need assistance selecting the best remortgage deal for your needs. It goes without saying that sourcing a good deal, as with most financial tasks, can be incredibly time-consuming and confusing. It can also be tempting to stay with your current lender to avoid the extra checks involved in switching mortgage providers but it is wise to explore all your options and work out the cost difference over the long term before you make your mind up.
To get the best remortgage deal, you should speak with a specialist mortgage broker who, ideally, has access to the whole market and can therefore search all the remortgage options available to you. As specialists, they usually have insights into which remortgage products might be easier to qualify for as well as those that offer the best mortgage rates.
Habito* is an online mortgage broker and has access to over 90 lenders providing you with a wide range of remortgage products to choose from. Habito's advisers can also provide bespoke mortgage advice to guide you through the choices to reduce the overall cost of your remortgage while prioritising what is important to you. You can choose to carry out your enquiry online or arrange to speak with a mortgage broker.
Alternatively, you can search for a mortgage broker in your area using VouchedFor* - a website that allows you to search for local professionals including mortgage brokers. The website can be used to compare the services provided by different brokers to help you select your mortgage broker based on the real experiences of customers who have used them.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses or take advantage of any exclusive offers - Habito, VouchedFor