Remortgaging to Release Equity
If you own a property you may find yourself in a position where you are asset rich but cash poor. This is a common situation for people to find themselves in and with the cost of living crisis in full swing it can be frustrating making ends meet each month while your property locks your liquid finances away.
The good news is that lenders may allow you to remortgage at a higher amount to free up some of the cash tied up in your property. You can remortgage to release equity for a variety of reasons. There are risks involved with releasing equity and you should consider your decision carefully.
Let’s explore remortgaging to release equity.
Why Release Equity from Your Home?
There are several reasons why you may wish to release equity from your home, the most common of which are:
- Home improvements
- Purchase a new property
- Fund living expenses
- Pay off existing debt
By far the most common reason people release equity in the UK is to improve their property. Property improvements come in all shapes and sizes and can be simple kitchen refits to extensive renovations or extensions.
Home Improvements and Releasing Equity
Lenders are normally happy to allow you to release equity for home improvements providing the work is not detrimental to the property value. A common misconception is that all home improvements will increase the property value.
In some cases, home improvements can negatively affect your property value such as installing mobility ramps, guide rails, and wet rooms.
Before you decide on releasing equity for home improvements it is worthwhile to have a conversation with a tradesman and estate agent to evaluate the cost of the project and whether it will impact the property value.
How to Remortgage to Release Equity?
When you remortgage, you will typically refinance the existing mortgage at the same value to achieve a better interest rate.
Remortgaging can be much more flexible and if you have enough equity in the property, you can add additional borrowing to your mortgage.
There are risks involved with any additional finance
- Potentially higher monthly repayments
- If the remortgage becomes unaffordable your home or property is at risk of repossession
- You may take longer to clear the debt
A mortgage broker will discuss the options available to you including ways of refinancing to keep monthly payments the same or to ensure that you pay off the debt in the same amount of time.
For example, you may be able to keep your monthly payments the same by either moving onto a more favourable interest rate or by extending the term of your mortgage.
You may be able to settle the debt in the same amount of time as your original mortgage by making higher monthly payments over the same term.
Discussing your goals with a mortgage broker will help make any remortgage to release equity manageable for your specific financial situation.
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How Much Equity Can I Release?
Lenders operate a minimum amount of equity you must hold in the property to make the mortgage an acceptable risk for them.
For example, most lenders are comfortable lending if you hold 10% of the property in equity on completion. This is why most lenders ask for a minimum deposit amount of 10% of the property value.
In some cases lenders will allow you to borrow money with as little as 5% equity in the property on completion.
When you ask to remortgage to release equity, a lender will consider how much money you wish to take and whether that leaves them enough money in the property for their risk calculations.
Each lender approaches this calculation in different ways and there is no absolute rule with how much you can borrow against your property. You will have to leave enough money for your chosen lender’s risk criteria in the property.
When you discuss remortgaging to release equity you should highlight how much you wish to release, and the broker will be able to advise if this is possible.
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Alternatives to Remortgaging if you Need Extra Cash
Taking secured finance in the form of a mortgage carries inherent risk because if you fail to make payments, your home can be repossessed to recoup the debt. Even though a mortgage is likely to provide a better interest rate, as it is secured, you should consider other financing options and see if they are more appropriate.
Unsecured loans are loans where you have no asset put down as collateral. Unsecured loan lenders typically lend up to £25,000 without requiring an asset such as your house or car put down against the debt. While they represent less risk than a mortgage, they typically have much higher rates of interest when compared to a mortgage product.
For smaller amounts of borrowing, credit cards can be invaluable, especially if they have a 0% interest rate. The 0% interest rate is an introductory rate and you will find your documentation represents a much higher rate that kicks in after your introductory rate ends. Credit cards can have extremely high interest rates and if you don’t manage credit card debt effectively it can quickly spiral out of control.
In some cases a traditional lender will choose not to extend further borrowing. This can be frustrating, especially if you have plenty of equity in the property. Second mortgages are a type of mortgage product offered by some lenders with more lenient lending practices. Once again, the debt is secured against your property and the interest rate on a second mortgage is normally a lot higher than a traditional mortgage. This is because if your property was repossessed, the lender with the first charge would have first access to reclaim their funds.
If you are aged 55 or over you may qualify for an equity release product such as a Lifetime Mortgage or Home Reversion Plan. Equity Release is a specialist product and you will need the assistance of an Equity Release broker to get the advice you need.
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Releasing equity can be invaluable, especially if you are in need of extra cashflow to ride out the cost-of-living crisis. There are risks involved with any debt so you should always speak to a mortgage broker to ascertain whether releasing equity is right for you.
Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage, providing fee free mortgage and equity release advice. Contact us to discuss releasing equity and remortgaging today.