Remortgage and Release Equity – Complete Guide
For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.
How do you remortgage to release equity? If you want to borrow money and have built up some home equity, you could switch your current mortgage deal and borrow more in the process. This is often used to fund home improvements, pay off other debts or finance further property investments.
This detailed guide explains exactly how remortgaging to release equity works with examples and your FAQs answered along the way. You need to read this before you apply to remortgage to release equity in the UK!
What is remortgaging?
Remortgaging is when you swap your current mortgage for a new one. Most people remortgage because they can get a better deal today than what they received when they first took out their mortgage. This may be because:
- Their finances have improved
- Their credit score has improved
- Average mortgage interest rates have decreased
- A combination of the above
So, remortgaging can save you money over the long term, but you will need to factor in the additional immediate costs of remortgaging.
When you remortgage you will be paying off your first mortgage earlier than agreed, and consequently, you may be charged early repayment fees. This might not be the case if you remortgage with the same lender. There may be other fees to consider as well, such as mortgage advice fees.
FREE Credit Report FOR LIFE!
I’ve snagged a deal for you..
Spot errors that could be ruining your credit report
Simple actions to improve your credit score
Better score, better deals
Can I remortgage my house to release cash?
It is possible to remortgage and borrow some extra money at the same time. This is known as releasing cash from your home, or more formally, releasing equity or remortgaging to release equity.
Home equity is the value of your property you own outright with no debt attached, and it can be expressed as a percentage of the value of your home – or the actual value. You work it out by subtracting all debts secured against the property away from the value of your home.
For example, someone with a property currently worth £210,000 and an outstanding mortgage of £70,000 will have 66.66% home equity, or £140,000 home equity (£210,000 – £70,000).
How does remortgaging to release equity work?
To correctly understand how remortgaging to release equity from your home works, we have created this example:
John and Judith are homeowners of a property in Kent. The value of the property currently stands at £250,000. They still have a small mortgage left to pay on the property, and the current balance of the mortgage is £50,000. They have no other debts secured by their home.
This means they have 80% home equity valued at £200,000. They want to borrow some money to make some home improvements around their home. They estimate that these home renovations will cost £20,000 in total.
So John and Judith go to the bank and ask to swap their current mortgage of £50,000 for a new mortgage of £70,000. The first £50,000 of the new mortgage is used to pay off the old mortgage, and they have thankfully incurred no early repayment fees because they are using the same lender (won’t always be the case!). The additional £20,000 is put into their bank account as a cash lump sum and used as required to fund their home improvements.
They continue to repay their mortgage debt monthly with interest based on the new terms for a fixed period. Because the mortgage debt has grown to £70,000, their monthly repayments are a little bigger now.
How much home equity do I own?
The amount of home equity you own will contribute to determining how much additional money you can borrow in a new mortgage – or any other home equity loan. Working out how much equity you own is a simple calculation, but there is one aspect of the calculator which can result in a big error.
To uncover the equity in your home, you need to take away all debts secured by your home from the property’s current value. Many people make the mistake of using the value of the property when they bought it and not accounting for any changes in the valuation.
You don’t need to call property surveyors or estate agents around for an accurate valuation (that’s what lenders may do!). But you should do your best to work out the current value of your property by looking at what similar properties nearby have sold for.
Why remortgage to release cash?
There are lots of reasons why somebody may remortgage their property and release cash from their home at the same time. The additional borrowing may be used for any reason, but this money is often earmarked for:
- Home improvements (new kitchen, bathroom etc.)
- Debt consolidation
- Further investments, including helping to buy other properties
- New vehicles
- Private education expenses or private medical bills
- Financial gifts to family members
How much equity can I release from my mortgage?
The amount of equity you can release when remortgaging will depend on personal details, including your finances and credit score. The most you will be allowed to borrow in a best-case scenario will be determined by the lender’s Loan to Value (LTV) ratio.
The LTV is a percentage that indicates how much of your equity you can borrow. It is never 100% because this presents a risk to the lender – and a risk of negative equity to you.
On average the highest LTV ratio is around 80%, meaning if you have £50,000 in home equity you may be able to borrow up to £40,000 at most. Naturally, doing so will increase the repayments on your mortgage, even if you secure a lower interest rate as part of the process.
The benefits when you remortgage to release equity
If you choose to borrow money through a new mortgage, the main benefits are:
- You keep all of the debt in one place
- It is easier to manage a single debt repayment
- Because your new borrowing is in with your mortgage, your loan amount is higher and you could get a lower interest rate than otherwise possible
- Because the additional borrowing is part of a secured loan, the interest rate could be lower compared to using an unsecured loan
The disadvantages of remortgaging to release equity
The drawbacks of choosing to remortgage to release equity are:
- You may have to pay mortgage advice fees or fees for a brokerage service
- You might need to pay additional applications fees and set-up costs
- Paying off your original mortgage early may trigger early repayment charges that can cost thousands of pounds
- Future mortgage repayments will increase
Alternatives to remortgaging to release equity
Remortgaging to release equity is not the only method of borrowing large amounts, and it is not the only way of using your home equity to access credit. Below are three alternatives if you do not want to remortgage to release equity.
A home equity loan is a loan determined by your home equity and secured against your property. It remains separate from your mortgage and can be taken out with any lender. These loans provide a cash lump sum that is charged with fixed interest monthly. You will repay the debt in a separate payment to your mortgage until it is cleared.
If you were unable to repay this loan, the lender could repossess your home and recover the debt by selling the property. However, the lender would have to give your mortgage provider the first helping of the sale proceeds to recover the mortgage debt. For this reason, these lenders will not allow you to borrow too much of your equity, but you can still get loans of significant value.
- Home equity line of credit
A home equity line of credit, also known as a HELOC, is similar to a home equity loan but does not provide the loan as a lump sum.
You take an initial lump sum and then have access to the rest of the money in a cash reserve that can be accessed during a drawdown period. You only borrow more money if required and only the money you take is charged with interest and needs to be repaid. These loans usually have a variable interest rate that can change throughout the year.
- Equity release loans
Equity release may be an option for a smaller percentage of readers. It is a method of borrowing large sums for over 55s who want to fund later life and retirement. They don’t make any repayments until they either die or move into care. Only then does the equity release loan need to be repaid, which is usually only possible through raising money from the sale of their home.
Most of the time the homeowner must have already paid off their mortgage to get equity release, meaning they own it outright and have 100% equity in their property. Yet, some lenders will welcome applicants with a small mortgage but require the mortgage to be cleared once they receive their equity release loan.
Only consider any of these products from lenders that are authorised and regulated by the Financial Conduct Authority.
Can you remortgage to pay off an equity loan?
Some hoemoenrs may have already taken out an equity loan on their property and now be wondering if they can remortgage to release equity and us the additional money to pay off their home equity loan.
This is possible and is just one example of how remortgaging to release equity can be used as a debt consolidation method. Consolidating debt is when the debtor takes out new credit and uses it to repay their other debts, meaning they now have fewer repayments to manage. It is most effective whent he new credit has a lower interest rate than the debt being cleared, so the debtor can save money on interest over the long term.
Is it better to remortgage to release equity or to use an equity loan?
Remortgaging to release equity or accessing equity through a home equity loan can both be good options. There are pros and cons of using either method, mainly centring aroudn the fees you’ll have to pay as part of the process. You may want to get financial advice from an authorised and regulated company on the Financial Services Register to make an informed decision.
Learn more about releasing equity with MoneyNerd
Head straight back to our blog for more information on how Loan to Value works, getting a personal loan in the UK and much more. We have lots more free guides on releasing equity as a homeowner. Don’t miss out!