If you have your heart set on home improvements, you may wish to explore remortgaging to release equity from your property. But what exactly does this entail?
Remortgaging to fund home improvements involves releasing equity in your home, i.e. borrowing more money against the value of your property. The loan amount is the cost of your home improvement plus whatever is left of your current mortgage. You can explore options from both your current lender and the wider market.
In this article, I’ll take you through what it means to remortgage to release equity, what the lender’s criteria might look like and the three main options for raising funds in this way.
To get personalised advice on how to remortgage for home improvements, contact Goldmanread today.
Can you remortgage to fund home improvements?
Yes, and in actual fact, funding property improvements is one of the most common reasons for remortgaging. Most lenders are happy to consider loans on this basis, as it reduces their risk, potentially increases the value of the property, and they can earn interest on the larger loan amount.
Where do I start?
The first thing you need to do is scope the work and contact a reliable contractor to give you an estimate of the cost and time scale.
Unfortunately, it is very common for homeowners to overspend when carrying out property improvements. So, building in an allowance/contingency of at least 10% is essential.
What are a mortgage lender’s criteria for equity release?
Most lenders consider the following when you are arranging a home improvement loan:
- The value of your house or flat.
- The amount of equity you have in your property.
- The type of home improvements you intend to carry out and how this affects the resale value.
- The level of borrowing required. Lenders typically have maximum LTV ratios, which determine the maximum percentage of the property’s value that they are willing to lend. The lower the LTV ratio, the less risk for the lender.
- Your creditworthiness and affordability. Most mortgage lenders will consider your credit history, i.e. any background adverse credit. They will assess your overall financial situation, so it is important to be aware of any changes that have occurred since you took your original mortgage.
What improvements can I carry out with a remortgage?
In a lender’s eyes, home improvements fall into two main categories:
- Light refurbishment – including kitchen replacement, refurbishment, a new bathroom, painting and decorating etc. Lenders are unlikely to ask for proof of these works.
- Heavy refurbishment – This involves structural changes to the property such as a loft conversion, extensions, conservatories etc. Typically, lenders will ask to see estimates of the refurbishment work to help them assess whether the cost of the loan will result in a significant resale value.
Sometimes, significant or complicated renovations (e.g. demolition with a view to rebuilding), may involve approaching specialist lenders. In some circumstances, a specialist lender may provide a bridging loan, a form of short-term mortgage finance which generally has high-interest payments. However, it’s uncommon for these types of loans to have an early repayment charge.
Given the potential risk, it is important to take mortgage advice before you enter into these types of finance options.
How do you remortgage to fund home improvements?
There are three main ways to raise equity for any home improvement:
1) Taking a further advance or second mortgage from your existing lender
This might make financial sense if early repayment charges apply to your existing mortgage deal. The disadvantage is that ‘Further Advances’ tend to be charged at higher rates than the other parts of your mortgage, so your monthly repayments may be higher.
2) Arrange a secured loan with a different provider
Generally, personal loans are a more expensive route than a mortgage secured against your home. They tend to come with higher interest rates and, therefore, higher monthly payments.
Whether this is the right option depends on how much equity you have in your home. A secured loan may be a good solution if you are looking at a higher loan to value or want to avoid early repayment charges.
3) Arrange a new mortgage with a new lender
This allows you to shop around for a more competitive mortgage deal than the one you have with your existing lender. It’s possible to secure a more competitive interest rate, which means that it is usually the most cost-effective route to raise additional money.
When considering any of these mortgage options for releasing funds, it is essential to look at the total cost of the loan across the whole mortgage term.
Why use a mortgage broker to release equity?
It’s wise to seek the advice of a mortgage broker like Goldmanread to assess the best option open to you. They will consider your personal circumstances and look at your current mortgage deal to fully assess your options.
They will then provide considered and independent advice on your options. Depending on the route you choose, your broker will then search the market to find the most competitive remortgage deals and help you complete all the necessary paperwork.
Start your home renovations today and remortgage with Goldmanread
At Goldmanread, we have helped many clients over the years to release equity to fund home improvements. If you are considering your options, we can search the market to find the lenders that can offer you the most competitive mortgage payments.
As part of our service, we will compare your current deal with the mortgage rates available across the market. As an FCA-regulated mortgage adviser, you can rely on us for responsible and impartial advice. We will take the utmost care to assess your circumstances to find the most suitable deal.
Frequently asked questions about renovating your home through remortgaging
Is releasing equity to fund home improvements a good idea?
Generally speaking, releasing equity from your property to fund renovations such as energy-efficient improvements is rarely a bad idea. Even if property prices fall, releasing extra money to pay for home improvements should improve your financial position overall.
What is the ideal loan-to-value ratio when remortgaging to release funds?
The ideal loan-to-value (LTV) when remortgaging for home improvements is generally 60-75%, as the mortgage lender is likely to offer a better interest rate.
This is because they face less risk as if they had to repossess the property, there would likely be enough equity to avoid a potential loss on the sale of the house.
How much can I borrow through remortgaging for home improvements?
How much you can borrow on your mortgage for home improvement depends entirely on your circumstances, e.g. income, affordability and the value of your property.
Do you get a lump sum deposited into your bank account when you remortgage?
Yes, once approved, the lender will generally release a lump sum taken from your home equity.
Is remortgaging to release equity cheaper than taking a personal loan?
Depending on the level of your current outstanding mortgage balance, remortgaging to release funds is often the most competitive route for funding home improvements. A secured loan is generally a lot more expensive in terms of interest.