How does Releasing Equity by Remortgaging Work?
Your home is your biggest investment. So it stands to reason you should make it work hard for you. Using it to release equity is one way you can by remortgaging or i.e. by using a fixed rate remortgage.
If you’ve built up equity (effectively the value) in your home, then you might be in a good position to do this.
- home improvements
- holidays
- medical treatments
- deposits for children
Are all among the biggest incentives for people to release equity.
But first: ‘What is Equity?’
Let’s be clear here.
We’re not talking about equity release schemes (these are available only to those aged over 55) but about releasing equity by remortgaging.
Equity is a confusing term. But in a nutshell, it is your share of the value in your home that you actually own, outside your mortgage commitment.
Your equity increases both as you make payments back on your mortgage and as your property increases in overall value.
An Example of an Equity Calculation
You bought a house valued at £250,000 and put forward a deposit of £50,000.
You took out a mortgage for £200,000.
£200,000 (mortgage) ÷ £250,000 (whole value) = 0.8
0.8 x 100 = 80 (80%)
At this point, your loan-to-value is 80%. In other words, the sum you’re borrowing is 80% of the value of your home. The other 20% you own and is your equity.
As you slowly pay back the money you’ve borrowed, your equity will increase.
Say, after five years, you’ve now paid back £50,000 of the loan, your equity will have increased to £100,000 (£50,000 deposit + £50,000 paid back).
100,000 (new equity value) ÷ 250,000 (whole property value) = 0.4
0.4 x 100 = 40 (40%)
You now own 40% of the value of your home, and your loan-to-value will decrease to 60%.
Providing the property market has remained buoyant, the value of your home will have increased too. So your LTV and the equity you now have in your home is likely even higher.
The Importance of the LTV
Your loan-to-value is important because the lower it is, the better the remortgaging deal you will get offered by a lender.
The best interest rates go to those with the lowest loan-to-values. They mean you’ll probably see a significant reduction in your monthly repayments.
If you have accrued equity in your home, you’re now in a position to release some of it by remortgaging. You can use this to spend on a home improvement project or deposit for your children, for example.
If you’ve lived in your home for some years, the property may now be worth £300,000 compared to the £200,000 you paid.
By remortgaging for a higher amount than you actually owe on your existing home loan, you can release some of that equity you have built up.
Depending on how much you release, you will likely be in a position where your LTV is lower than the one you started out with.
So even though your total mortgage amount has increased, you may still get a deal with cheaper monthly repayments than you began with.
Should I release Equity by Remortgaging?
Depending on what you want to use the cash for, you might be better served by using your savings, a personal loan or credit card.
But given that interest rates right now are historically low, it’s a good time to consider remortgaging to release equity.
You will also still have to go through lenders’ affordability tests, which will examine your income and outgoings.
Your equity will give you access to a lump sum you can use elsewhere – be it in property for your children or a home improvement project to increase the value of your home.
We’re happy to talk it through with you here.
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