Understanding Remortgaging to Release Equity

Remortgaging to release equity is a financial strategy that has gained popularity among UK homeowners in recent years. In simple terms, it involves taking out a new mortgage with a higher amount than the existing one to release equity from the property.

In this article, we'll explore the concept of remortgaging to release equity in-depth and help you make informed decisions when considering this option.

What is Remortgaging to Release Equity?

Before we delve into the specifics of remortgaging to release equity, let's understand the basic terms involved.

What is Remortgaging?

Remortgaging, also known as refinancing, is the process of replacing an existing mortgage with a new deal from a different mortgage broker or your existing lender. People typically remortgage to get a better deal, such as lower interest rates, lower monthly payments, or a longer or shorter repayment term. It is important to shop around multiple lenders

What is Equity?

Equity is the difference between the current market value of your property and the outstanding mortgage balance. For instance, if your property is worth £500,000, and your outstanding mortgage balance is £250,000, your equity is £250,000. Homeowners can access this equity by remortgaging or selling the property.

What is Loan-To-Value (LTV)?

Loan-to-value (LTV) is a financial ratio that measures the amount of mortgage borrowing in relation to the property value. It is calculated by dividing the mortgage amount by the property value and expressing the result as a percentage.

For example, if you have a mortgage of £200,000 on a property valued at £400,000, your LTV is 50%.

Difference between Remortgaging to Release Equity and Equity Release

Equity release is a financial product designed explicitly for older homeowners nearing retirement (typically 55+) who want to release equity from their property without selling it. This involves taking out a loan secured against the property's value, and the loan and interest are repaid from the sale of the property after the homeowner dies or moves into long-term care.

In contrast, remortgaging to release equity is a general term that refers to taking out a new mortgage with a higher amount than the existing one and using the extra funds to release equity from the property.

Reasons behind Remortgaging to Release Equity

People consider remortgaging to release equity for various reasons according to their personal circumstances. Here are some of the most common ones:

• Home improvements: You may want to use the equity released to fund home improvements, such as a new kitchen, extension, or conservatory.
• Debt consolidation: Do you have an outstanding loan? This option can be a way to consolidate high-interest short-term debts, such as credit cards or personal loans, into a single, more manageable payment, which can help your credit rating.
• Funding a big expense: Homeowners may need to access a significant sum of cash to fund a significant expense, such as a child's education (school fees or university fees) or a wedding.
• Buy-to-let investment: Some homeowners may consider this option to buy a second property to rent out as a buy-to-let investment.

Benefits of Remortgaging to Release Equity

• Access to cash: The main benefit of remortgaging to release equity is access to a large sum of cash that can be used for various purposes.
• Lower interest rates: If the new mortgage has a lower interest rate than the existing one, remortgaging to release equity can save homeowners money in the long run.
• Better mortgage terms: Remortgaging to release equity may allow homeowners to secure better mortgage terms, such as a longer repayment period, which can reduce monthly payments and make them more manageable.
• Increase in property value: If the funds released from remortgaging are used for home improvements, it can increase the property's value, which may result in higher profits if the property is sold in the future.
• Debt consolidation: Remortgaging to release equity can be a way to consolidate high-interest debts into a single, more manageable payment with a lower interest rate.

Is this a good step for you?

Knowing when remortgaging to release equity is a good step for you requires a careful consideration of several factors. We recommend reaching out and getting expert advice from a financial adviser.

Key Factors to Consider Before Remortgaging to Release Equity

While there are many benefits to remortgaging to release equity, it's essential to consider the following factors before making a decision:

• Early repayment charges (ERCs): Homeowners should check if their current mortgage has an early repayment charge, which can make remortgaging to release equity costly.
• Additional fees: Remortgaging to release equity may come with additional fees, such as arrangement fees, valuation fees, and legal fees.
• Loan-To-Value (LTV) ratio: Lenders have a maximum LTV ratio they will allow, so homeowners need to check if they can release enough equity without exceeding the lender's limit.
• Affordability: You should assess if the monthly mortgage repayments on the new mortgage will be affordable, as they will likely be higher than the existing mortgage.
• Repayment period: If you choose a longer mortgage repayment period, you will pay less each month, but it will take longer to pay off the mortgage and result in more interest paid in the long run.
• Better mortgage terms: Remortgaging to release equity may allow you to secure better mortgage terms when you borrow money and find mortgage deals, such as a longer repayment period, which can reduce monthly payments and make them more manageable.
• Increase in property value: If the funds released from remortgaging are used for home improvements, it can increase the property's value, which may result in higher profits if the property is sold in the future.
• Debt consolidation: Remortgaging to release equity can be a way to consolidate outstanding loans or high-interest debts into a single, more manageable payment with a lower interest rate.

Advantages of Remortgaging to Release Equity

1. Flexibility: Remortgaging to release equity offers homeowners flexibility in how they use the released funds.
2. Lower interest rates: If the new mortgage has a lower interest rate than the existing one, homeowners can save money on monthly repayments and in the long run.
3. Improved credit score: Making regular payments on the new mortgage can improve a homeowner's credit score.

Disadvantages of Remortgaging to Release Equity

1. Increased debt: You may be taking on more debt than before, which could be a cause of stress.
2. Costly fees: Remortgaging to release equity may come with additional fees, such as arrangement fees, valuation fees, and legal fees.
3. Risk of negative equity: If the property's value falls, you may find yourself in negative equity, meaning the outstanding balance is higher than the property's value.

Conclusion

Remortgaging to release equity can be a useful financial strategy for homeowners who need to access a lump sum of cash for various reasons, such as home improvements, debt consolidation, or a significant expense.

However, homeowners should carefully consider the key factors before making a decision, such as early repayment charges, additional fees, and affordability.

While there are many benefits to remortgaging to release equity, it's essential to weigh up the advantages and disadvantages to make an informed decision that suits your financial situation and goals after consulting a financial adviser too.