Remortgage to Release Equity: Is it right for you?

If you need to borrow money, you might have heard you can remortgage to release equity. This is an option to consider, but, there is a criteria you need to meet to qualify.

In this insight, we will break down what's possible and if arranging a remortgage to release equity is right for you.

Key Takeaways

• A Remortgage will allow you to borrow more money than you may have been able to with a personal loan.
• You can only borrow up to 90% of your property value.
• The lender will need to assess your affordability before approving.
• There is some paperwork that comes with Remortgaging and the applications can take around 4 weeks to complete.

What Is a Remortgage To Release Equity?

If you Remortgage to release equity, it means moving your mortgage to a different lender, and borrowing extra money at the same time. Your new mortgage payments then include the extra amount borrowed. You can use the money for things like school fees, home improvements, or to clear debts."

A remortgage means moving your mortgage to a new lender, which could lower your interest rate or change your mortgage terms. You can also borrow more money during a remortgage, which is called 'releasing equity'.

How Does a Remortgage to Release Equity Work?

Equity is the difference between your home's value and the outstanding mortgage value. For example, if your home is worth £250,000 and you have a mortgage of £200,000, you have £50,000 in equity.

To release equity, you can simply request to borrow more money when you remortgage. The extra funds will be sent to your bank account and your old mortgage will be paid off.

For example, John owns a house worth £400,000 and has a mortgage of £250,000. He wants to make some home improvements that will cost £75,000. John decides to remortgage his home to release equity. He finds a new lender and refinances his mortgage for £325,000, releasing £75,000 in equity (£325,000 remortgage amount - £250,000 outstanding mortgage). This money is then used to pay for his home improvements. As a result, John's mortgage repayment term and interest rate will be adjusted, and his monthly payments will increase to reflect the additional amount he borrowed. This allows John to complete the improvements he desired while continuing to own his home. 

Is a Remortgage To Release Equity Right For You?

Consider the following points to decide if remortgaging is right for you. There's no one-size-fits-all answer to this question.

Early repayment charges

Check if you have any fees for remortgaging, known as early repayment charges. These charges apply if you try to pay off your mortgage while you are in a fixed rate or tracker product period, which usually lasts 2-5 years. They can be as high as 7% of your outstanding mortgage value. Exiting your mortgage agreement with these charges means paying a large fee. Read our insight, Can you remortgage early? for more information.

Loan to Value

If you've reached your maximum Loan to Value (LTV), you may not be able to borrow more on your property's current valuation. However, some lenders allow remortgaging and releasing equity up to 90% LTV. For instance, if your property value is £200,000, your maximum loan can be £180,000. The equity you can release is the difference between 90% of your property value and the outstanding mortgage amount. Consider if this amount is enough to achieve your goal.

Your age and retirement plans

If you're nearing retirement and want to release equity from your property. You have two options:

• You can either pay it off before retiring, which may shorten your mortgage term and result in higher repayments.
• You can apply to take your mortgage into retirement. That will allow for a longer term, reducing your monthly payments.

Getting approved for a lending into retirement mortgage can be difficult as you need to provide evidence that the remortgage is affordable. If you're over 55 and do not want to make repayments, consider whether equity release is a better mortgage option for you.

Is your Mortgage already paid off?

If your mortgage is already fully paid off, you will need to incur additional legal costs for conveyancing work. These costs can make the overall borrowing more expensive. Therefore, you should carefully consider whether the upfront costs of remortgaging outweigh its benefits before proceeding with the process.

Pros and Cons of a Remortgage to Release Equity

Consider the pros and cons of remortgaging to release equity and how they impact your decision on how to proceed:

Pros

You can borrow more through a mortgage than on a personal loan

A remortgage could be a better option for borrowing larger amounts of money than a personal loan. This is because most banks will not lend more than £25,000 on a personal loan. If you need to borrow more money, such as for home improvements, a remortgage may be the answer as the maximum loan amount is based on affordability and equity available.

Mortgage rates are cheaper 

Mortgage rates are usually lower than personal loan rates, which means you'll likely pay less interest with a mortgage. However, if you extend your borrowing period beyond what's possible with a personal loan, you may end up paying more in interest overall.

Ability to stretch repayments

When you remortgage to release equity, you can align the repayments of your newly released equity with your existing mortgage. This flexibility allows you to choose lower monthly repayments, but it may also result in higher overall interest payments. Compared to a personal loan, which is usually limited to a maximum term of 7 years, a remortgage can have a term as long as 40 years.

You can consolidate debts

If you have debt, especially on credit cards, the interest can be costly. If you remortgage to release equity, you can use the funds to pay off all your debts. This provides a fresh start with a single consolidated mortgage payment, making budgeting simpler. However, it's important to cut up your credit cards afterward to avoid falling into the same situation in the future.

You will need to consider lender policy on debt consolidation as it could often come with certain restrictions. Such as only extending the refinanced debt to a maximum period of 10 years.

Cons

Administration of a remortgage

It takes a bit of work to remortgage. You need to arrange your new mortgage and you need a solicitor for a remortgage to complete the conveyancing work required. Both of these tasks require some work on your part. However, a good mortgage adviser will be able to help you complete the paperwork if you are struggling. 

Securing more money against your home

By remortgaging to release equity, you are taking on more debt secured against your home. This means that if you cannot afford to repay the loan, you risk losing your home. Additionally, releasing equity increases your loan-to-value ratio, which could be a problem if house prices decrease. This could result in negative equity, where you owe more on your mortgage than the property is worth. Negative equity could make it difficult to move house if you cannot pay off the whole loan.

Debt consolidation can cost you more in the long run

If you extend the repayment period for debt consolidation by remortgaging, you may end up paying more in the long run, even if the mortgage interest rate is lower than the original loan.

What Are The Alternatives to a Remortgage?

If you are looking to borrow money, completing a remortgage to release equity isn't your only option. Review the following options to see if these make better sense for your circumstances.

Equity release

If you're over 55, you have the option to release equity through an equity-release mortgage. There are two types of equity release: home reversion plans and lifetime mortgages. With either option, you don't need to make repayments until you pass away, and the debt is repaid from the sale of your house. This could be a good choice for older borrowers who want to boost their retirement, although it means leaving a smaller inheritance for their family.

Further Advance

A further advance is a good option if you want to borrow more money on your mortgage without remortgaging. You speak to your existing lender and may get higher interest rates for a further advance. However, you can save the hassle of remortgaging and you do not have to pay early repayment charges if you borrow during the middle of your fixed rate term.

A personal loan

Personal loans are now more flexible, allowing you to repay them without fees. If you need a short-term loan for less than £25,000, a personal loan may be a better option than a remortgage. For example, if you want to buy a new car but haven't sold your old one, a flexible personal loan allows you to borrow the full amount for the new car and repay part of the loan without penalty when you eventually sell the old car. However, the repayment amount remains fixed unless you refinance the loan.

Eligibility Criteria to Remortgage To Release Equity

To determine whether you are eligible to remortgage to release equity you'll need to consider several factors:

Affordability

To remortgage, you need to show that you can afford the existing mortgage and any extra borrowing. This means proving your income by providing payslips if you're employed or SA302s if you're self-employed. Income ratios are usually around 5 times your salary for a single application and 3.5 times for joint applications. You can use your annual salary to get an idea of whether you will pass affordability.

Credit score

When remortgaging, it's important to know that lenders will review your credit score and credit history. Having an existing mortgage doesn't guarantee a pass on credit scoring. Lenders will look for any missed payments, county court judgements, or other bad debts that may have occurred since the original mortgage was agreed upon. If you've maintained a healthy financial life, you should not expect any issues with credit scoring.

Property value and loan to value

Lenders usually limit the amount you can borrow through a remortgage to a maximum of 90% of the property's value. To determine the maximum amount you can borrow, you should calculate 90% of your estimated property value and subtract your existing loan amount.

Age

Age itself shouldn’t create any application issues. However, the older you are, the less time you have to repay the mortgage. As many lenders do now lend into retirement, if you can prove you have retirement income, you can still arrange to borrow late into life. However, there is a cap to the age. Most lenders use 75. 

The closer you are to the maximum age of borrowing, the shorter your mortgage term may need to be. This could result in unaffordable repayments for you. If this is the case, equity release may be a better option for you.

How To Remortgage To Release Equity?

There is a lot to consider when deciding whether to remortgage to release equity. Sunny Avenue always advises visitors to seek advice. Advice is bespoke and invaluable. If you are looking for a Mortgage adviser to help you work through your options, you can review our mortgage adviser directory or use our Sunny Fact Find and we will find the most suitable adviser to help based on your needs.