How does remortgaging release equity?

couple looking at remortgaging to release equity

Many homeowners with a good percentage of equity in their property seek to release some of their cash for reasons such as home improvements, repaying debts, other property purchases, etc. As a mortgage broker, I’m often asked, “How does remortgaging to release equity work?”.

When you release equity, you are essentially borrowing more money against the value of your home. The equity in your property, i.e. the difference between your home’s value and the remaining mortgage amount, is converted into cash via a mortgage. This is usually received as a lump sum.

Mortgage lenders request that the use of funds is specified at the outset. This is to assess the level of risk and ensure it’s in line with their lending criteria. I’ll take a deeper look into equity release through remortgaging in this article.

To get personalised mortgage advice, please get in touch with Goldmanread today.

What does it mean when you remortgage to release equity?

Your home’s equity is what is left when you reduce its current market value by what is left of your existing mortgage. For example, if your property is currently worth £750,000, and you have a mortgage balance of £250,000, your equity is £500,000. Basically, it’s the amount of your home that you ‘own’.

Releasing equity from a property means taking some of the value out of your property via a new mortgage or a secured loan.

At times when house prices are rising, it is common for homeowners to take equity-release mortgages. When the property market is declining, however, it is less common, and unlucky homeowners may even suffer negative equity, i.e. the value of their house is less than the mortgage secured on it.

How much equity can you release?

The amount of equity that you can release depends on several factors, which include but are not limited to the following:

  • Loan to value (LTV) – If the LTV is low, then you have a greater chance of approval for equity release. You are also more likely to secure a more competitive deal on a fixed or variable-rate term.
  • Your income – Lenders calculate the maximum mortgage loan available to you by applying their unique affordability calculation, which involves an assessment of your income and credit commitments. A lender will consider both applicant’s income if you have a joint mortgage.

Will my monthly repayments increase if I release equity?

This is not necessarily the case and depends on the interest rate secured on the remortgage. Moving from the standard variable rate of your current lender to a more competitive rate could result in cheaper monthly repayments, even though you are taking on more debt.

Why do homeowners choose to remortgage to release equity?

There are many reasons that homeowners opt to remortgage to release cash:

Repaying unsecured debts

Some property owners choose to release cash to settle debts like personal loans. It is particularly common for borrowers to remortgage when a money transfer credit card is approaching the end of its interest-free period.

Clearing debts from your credit record via a remortgage can also improve your credit rating, putting you in a more favourable position for future borrowing.

However, securing short-term debts in this way often works out to be more expensive over the term of the mortgage.

Home improvements

Home renovations are another big reason for releasing cash, e.g. loft conversions, new kitchens, extensions, energy-saving solutions, etc. Mortgage providers are generally happy to lend for this purpose if it’s likely to increase the property value.

Read more about releasing equity for home improvements in this useful article.

Other reasons for releasing equity

Other reasons for raising money via equity release include buying a second home or investment property, purchasing a new car, funding a child’s education, gifting, planning for retirement, or even taking an extended trip abroad.

Advantages of remortgaging to release equity

Let’s look at some benefits of releasing equity with a remortgage.

  • You will generally secure a more competitive interest rate when compared to other forms of unsecured borrowing, such as a personal loan. This is because the loan is secured on your property, so it is a lower risk for the lender.
  • If you take a further advance from your existing lender or a secured loan from another provider, you can keep your current mortgage in place and still raise funds without incurring early repayment charges.
  • If you are on a competitive interest rate with your existing mortgage provider, taking a further advance or secured loan means you can keep it, resulting in cheaper overall repayments. With current interest rates at a 14-year high, this is a compelling reason.

Disadvantages of remortgaging to release equity

As with all forms of borrowing, there are disadvantages to remortgaging to release equity, such as the following.

  • The most obvious disadvantage is that if you take more equity, you will increase the balance of your outstanding mortgage.
  • Taking on a larger mortgage may become a problem if house prices fall, increasing the risk of negative equity.
  • If your personal circumstances change, it may become more difficult to remortgage in the future.

When is the best time to remortgage to release equity?

Given that remortgaging to release cash will increase your outstanding mortgage debt, it makes financial sense to ensure you have enough time left on the term to keep the monthly repayments affordable.

There is a specialist type of equity-release mortgage aimed at borrowers who are either retired or are nearing retirement, sometimes called a lifetime mortgage. This allows the borrower to release equity to increase their retirement income or undertake essential renovations to their home before retirement, for example.

For specialist mortgages like this, it is best to seek advice from a professional mortgage broker who can explain in detail how the process works.

How does it work?

To release equity, you should start by assessing your financial situation, the current market value of your property, and your outstanding mortgage balance to determine how much equity you can potentially release.

Getting professional advice is important as the process is complex and can have significant financial implications. An experienced broker will ensure that you can make the new mortgage repayments and help you reach an informed decision that aligns with your circumstances and goals.

If you decide to proceed, you must submit a mortgage application to your existing mortgage lender or a new lender. They may conduct a property valuation to assess the current market value and ask for evidence of how the funds will be used, which must fit their criteria.

Upon approval, you’ll receive an offer detailing the terms of the remortgage. The funds will be released to you upon completion, usually as a lump sum.

How long does it take to remortgage and release equity?

The time it takes to remortgage and release equity can vary. The process typically takes anywhere from four to eight weeks or more, depending on factors such as the complexity of your financial situation, the lender’s processing times, and any legal requirements.

It’s advisable to start the process well in advance of when you need the funds to ensure a smooth and timely completion.

Are you thinking of remortgaging to release equity? Goldmanread can help

If you are considering arranging a new equity release mortgage, speaking with an experienced mortgage broker is important. At Goldmanread, we have assisted clients with remortgage requirements for 15 years.

We are independent and have access to a range of mortgage lenders. This means we can help find you a competitive interest rate, which can potentially help you save money on your monthly repayments.

Before completing your mortgage application, we will assess your circumstances and reasons for releasing equity to ensure you meet the lender’s criteria. Getting this right at the outset is important to save you time and money, which is our primary goal.

Please get in touch today to get started.

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Clive Read

Clive Read is an appointed representative of PRIMIS Mortgage Network. PRIMIS Mortgage Network is a trading style of Personal Touch Financial Services Ltd which is authorised and regulated by the Financial Conduct Authority.

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