Can you remortgage to release equity?

Remortgaging can release equity you've built up in your property.

If you want to raise money for home improvements, to help support your family, or to pay off outstanding debts, then remortgaging to release equity might be an option you want to explore. But is it the best solution for you? Let’s look in more detail.

What does remortgage mean?

Remortgaging means taking out a new mortgage loan on your existing property. You stay in the same home and use the equity that you've built up in the property as security for a new mortgage.

You may want to remortgage to improve the deal you have with your current provider or move to a new lender, so that your repayments are lower.

You can remortgage to release money by taking out some of the equity you've built up. This could be possible if you’ve paid off a big chunk of your existing mortgage already or if a rise in house prices has contributed to having additional equity in the property. A new mortgage loan would act as a loan to give you access to your cash, rather than it being tied up in your home's equity.

Remortgaging could mean that you're taking on more debt if you’re borrowing more against your property. If you can't meet the repayments, you are at risk of losing your home, so you need to carefully consider if this is the best option for you.

How to remortgage to release equity

You can remortgage to release equity from your home, but usually you'll need to have built up a large amount of the portion you own outright before you can do this.

If you've lived in your home a while and been paying off your mortgage for a few years, there's a good chance your home's value has increased over that time, which could have increased your equity. This gives you the opportunity to explore what deals might be available for you to release some of this.

What happens when you remortgage to release equity?

When you remortgage to release equity, you take out a new mortgage on a property that you already own in full or in part. Here’s a straightforward example of how it works:

• Say you bought a house for £500,000 with a £100,000 deposit and a £400,000 mortgage.
• If you've paid off £300,000 worth of capital on your mortgage, then there would be £100,000 of capital left to pay.
• When remortgaging, you could get a loan for £150,000 rather than £100,000, and so you would be borrowing an extra £50,000 that you could use how you wish.
• You'll need to ensure that you're able to repay the monthly mortgage amount, as your home may be repossessed if you do not keep up the repayments.

How to release equity from your home by remortgaging

If you want to remortgage and release equity, you should speak to your existing lender to see how you can improve on your deal or look at deals from other lenders. How much you can borrow, and whether you'll be accepted, will depend on the same criteria as if you were applying for a new mortgage.

A lender will want to know about your finances, your credit score and your ability to make the remortgage payments before they will agree to lend you money.

How much equity can you release when you remortgage?

The amount of equity you can release when remortgaging will depend on a number of factors:

• How much equity you have in your property
• The value of your home
• Your financial circumstances – income, ability to make repayments and credit rating
• Your age – some providers may be more reluctant to lend to older borrowers

Comparison sites and lenders often have remortgage calculators on their sites to give an indication of the amount that can be lent, but you may want to consult with a mortgage broker to get a full picture.

How does loan-to-value ratio impact remortgaging?

The amount a provider will offer and the interest rates they will offer on a new loan will be determined by the loan-to-value ratio (LTV) of your property.

LTV is the difference between the size of your mortgage and how much equity you have in your home, expressed as a percentage.

For example: if you buy a house for £100,000 and have a deposit of £25,000, you'll need a mortgage of £75,000. The LTV of this would be 75%, and you would have equity of £25,000.

As you pay off the remaining £75,000 in monthly instalments, the amount of equity you have increases and the LTV reduces. If the value of your house increases over time, the LTV reduces further. A lower LTV usually means you will get a better interest rate.

If you decide to remortgage, your mortgage provider will use the LTV of your property to work out the interest rate they'll charge. Remortgaging when your house value has increased or when you have paid off a higher percentage of your original mortgage will make you more attractive to many providers.

Most providers won't remortgage properties with a LTV higher than 75%, as there isn't enough equity to secure a loan against. If you are offered a remortgage with a higher LTV, interest rates will almost certainly be higher to reflect the higher risk.

How does remortgaging affect your repayments?

If you're borrowing more money against the value of your home, either your monthly payments or the length of time you take to repay your mortgage will probably increase, adding to the overall cost. But if your LTV is lower, you may be offered a lower interest rate, which could reduce your payments, so the overall difference may not be too big.

You should also be aware of arrangement and legal fees for your new mortgage deal, as well as any early repayment or exit fees from your current mortgage.

Can you remortgage to buy another property?

Yes – when you remortgage to release equity, you can use the cash however you want to. If you have enough equity in your home, you can use it to put down a deposit on another property or even buy one outright. But note that some lenders will ask for a larger deposit on a second property and interest rates may be higher.

If you still have a mortgage on your first property, you'll also need to be aware of how remortgaging might mean you incur early repayment fees or other expenses such as arrangement and legal fees or valuation costs.

If you are considering buying an additional property, you should seek professional advice and fully explore tax and income implications that come with releasing equity to buy a second home.

What are the pros and cons of remortgaging to release equity?

Some of the pros of remortgaging to release equity:

• You can remortgage to release money and get access to cash that would otherwise be tied up in your property.
• You can use the money to pay for immediate needs such as school fees or to fund home improvements.
• If you have built up a lot of equity in your home, remortgaging might not negatively impact your LTV, meaning you may qualify for better interest rates on a new deal.

Some of the cons of remortgaging to release equity:

• If you are borrowing more money your monthly repayments might be higher.
• If you are borrowing over a longer period of time you will end up paying more in total.
• If you can't afford the repayments your home could be repossessed.
• Changing from your current mortgage may mean you face early repayment charges.
• If house prices fall you could fall into negative equity – where the cost of the outstanding loan is higher than the value of your home.

What are the alternatives to remortgaging?

Releasing equity from your house by remortgaging is not the only way you can release money from your property, you can consider the following alternatives:

• Borrowing more money from your existing mortgage lender: you might be able to borrow more at your existing mortgage rate or at a competitive rate. This allows you to avoid early repayment charges or rearrangement fees and can be a faster route to more money.
• Personal loan: these might have a higher interest rate, but as the loan is paid off much more quickly this could work out cheaper than remortgaging.
• Money transfer credit card: you could transfer smaller amounts from a money transfer credit card to your bank account using a card that offers 0% interest rate for an amount of time. You should pay the amount back in full before the end of the 0% interest period to avoid higher interest rates.
• A joint mortgage: if you're thinking about remortgaging to help a child buy a property, instead you could consider a joint mortgage that would allow them to borrow more based on both your incomes.
• Equity release: the most popular type of equity release is a lifetime mortgage, which is a loan secured against your home. This is available when the youngest homeowner is 55 or over and provides tax-free cash based on your age(s) and the value of your home, which must be worth at least £70,000. This doesn’t need to be repaid until your home is sold when the last homeowner dies or goes into permanent long-term care, but this will reduce the value of your estate, and may affect your entitlement to benefits. A lifetime mortgage is a loan secured against your home.

Saga Equity Release, provided by HUB Financial Solutions Limited, is a no-obligation, no-pressure advice service dedicated to finding out if equity release is right for you.

As part of the Saga Equity Release service, a specialist equity release adviser will review your current financial situation with you and look at all the alternatives you have to release the funds you need, including remortgaging and more.