How to remortgage to release equity

Remortgaging your home to release equity may appeal if you have paid off a large chunk of your mortgage.

If you have a mortgage then ‘equity’ is the amount of a property you own outright. You build this up as you pay off more of the loan. Remortgaging to release equity is the process of taking out a mortgage against the value of your home in order to release cash.

In this article, we will cover:

• How much equity do I have?
• How to remortgage to release equity
• How long does it take to remortgage and release equity?
• How much can I borrow with equity release – use our calculator

Read more: Remortgaging: everything you need to know

How much equity do I have?

Equity is the amount of your home you own outright minus any outstanding mortgage on it. This is known as the loan-to-value (LTV) ratio. So, if you have completely paid off your mortgage, then you will own 100% of the equity in your home.

Say you bought a property worth £200,000 with a 25% deposit and a £150,000 mortgage, the LTV is 75%, and you will own 25% of the equity – or £50,000.

Your equity and the LTV will change over time depending on house prices and how much of your mortgage you are paying off. 

For example, if your home rises in value so that it is now worth £300,000, your equity becomes £150,000, or 50%. If you have paid off £50,000, the LTV is now 33%, and so on.

The LTV is important because it is what a lender will use when discussing rates for remortgaging to release equity.

Generally, the lower the LTV, the better the interest rates that you will be offered, meaning cheaper repayments.

How to remortgage to release equity

Remortgaging is very common and it usually happens at the end of a mortgage product term. You may want to switch to a lower rate or between a fixed, variable or tracker-rate mortgage.

Remortgaging to release equity works by taking out a mortgage that allows you to borrow more against the value of your home. This is sometimes done by those whose homes have shot up in price.

It means they can take on extra debt on top of their existing mortgage debt.

Take the example of a home originally worth £200,000 that has increased in value to £300,000, and on which you currently have an outstanding mortgage of £150,000 – giving you equity of £150,000 and an LTV of 50%.

At the end of your current fixed-term deal, you could look for the best one that you can find at 50% LTV or you could remortgage for more than this amount.

If you are over 55, you could opt for equity release to unlock some of the value of your home, so which is best: remortgaging or equity release?

Why remortgage to release equity? 

1. Home improvements – you may want a new kitchen or adapt your home if you are getting elderly
2. For children or grandchildren – you can give money to children or grandchildren now to fund school fees or to help them get on the property ladder. For example, rather than wait until you die.
   This could also help reduce inheritance tax bills. 
3. Boost your retirement income – If you find yourself with a small pension pot, remortgaging could be used to give you access to extra money. Equity release – which is different to standard remortgaging – is also an option here for older homeowners.
4. Pay off short-term debts – Using the money to free yourself from monthly repayments on a loan or overdraft which have a higher interest rate.
5. Starting a business – Getting a loan to finance a new business can be tricky as you need a business plan to get funding. Borrowing money via releasing equity could be simpler and the rates tend to be cheaper than for a business loan. If your venture isn’t as successful as you had hoped, you will still have to pay back the loan or risk losing your home.
6. For enjoyment – It doesn’t all have to be about the sensible stuff. You can also free up some cash for personal use like the holiday of a lifetime.

How long does it take to remortgage and release equity?

The average remortgage takes between four and eight weeks, according to Barclays. But it will depend on how well-prepared you are and the efficiency of the mortgage lender (and its solicitor).

If you have all your paperwork organised and the information required by the lender to hand, the process will likely be quicker. 

What are the risks of remortgaging to release equity?

You are taking on more debt so you should consider speaking to a mortgage broker because remortgaging comes with a number of risks that you need to consider. 

If you are rejected, your credit score could also be adversely affected, affecting your creditworthiness. 

Another risk is that there is no guarantee house prices will continue to rise, and you could be left in negative equity if prices fall. This is where your loan is bigger than the value of your home. 

There are also a number of fees and charges to consider. Some mortgage lenders charge big exit fees if you choose to move from your current mortgage to a new one before the current product term ends. 

Remortgaging during an initial fixed or tracker period could leave you with early repayment charges (ERCs). These charges are generally worked out as a percentage of your outstanding mortgage and are typically between 1% and 5%.

While that may not seem a lot, 1% on a £150,000 loan is £1,500, and 5% would take £7,500 out of the equity you could release by remortgaging. 

If you have been moved onto a lender’s standard variable mortgage rate then an ERC is not usually charged.

However, often you will be charged an administration fee of about £100 for closing the account. To get a mortgage, you may also have to pay a product fee, which can set you back about £1,000.

This can be added to your mortgage but you will be charged interest on it. You may also have to pay any legal fees involved with remortgaging.

What are the alternatives to remortgaging? 

There are alternatives to remortgaging in order to release equity. You might want to consider these if you don’t think remortgaging is right for you or you are an older homeowner and your lender won’t allow it:

1. Personal loan

While the interest rate is likely to be higher than remortgaging, you are likely to pay it back over much less time and so it could save money in the long run. The maximum you might be able to borrow could be between £25,000 and £50,000.

Check with your own bank first as they tend to offer the best rates to their existing customers. Make sure before committing to a large loan that you would be able to repay it. 

2. Joint mortgage

For those looking to help their children or grandchildren onto the property ladder, some lenders offer joint mortgage products. These take into account the income of both applicants – i.e. you and your child or grandchild.

This way you may be able to borrow more. You could also look at a guarantor loan where you agree to pay if they aren’t able to make the repayments.

3. Credit card

While the interest rate on a mortgage is generally much cheaper than the rate on a credit card, you could use a 0% money-transfer credit card instead. These cards offer a set period at which you make the repayments interest-free and are useful if the sums you need are fairly small.

Be aware that you will be moved onto a much higher interest rate after that period is up.

Be sure you can pay the money back in full or switch to a balance-transfer card before the end of the interest free period. Although there is always a fee for this and it is not guaranteed that you would be accepted for an alternative balance-transfer card.

4. Equity release

This is different to remortgaging and is usually only an option for homeowners aged 55 and over. Equity release products come in two main forms:

• A lifetime mortgage = a loan, secured against the value of the property, that enables you to carry on living in your home. The loan is repaid when you die or move into long-term care.
• A home reversion plan= you sell part or all of your home to an equity release provider and continue living there.

As with mortgage lenders, equity release companies must be authorised and regulated by the financial services regulator, the Financial Conduct Authority. For more on this, read our guide to equity release. 

5. Downsizing

You might want to consider downsizing or moving to a cheaper area to free up some cash.

Renting a room in your house to a tenant could also be an option to raise funds.

How much can I borrow by remortgaging?

How much you can borrow depends on a number of factors, including your income, age and how much a bank or building society is willing to lend to you.

Those nearing retirement may find it more difficult to remortgage. That’s because the maximum age limit is typically set at 65 to 70 for a new mortgage.

Lenders will want to check your credit report to ensure that you can afford to repay the loan and you wouldn’t be over-stretching yourself.

Your loan-to-value (LTV) ratio and current value of your home will also be considered. The lower the percentage LTV, the better the deals you are likely to get.

How much can I borrow with equity release?

You can normally borrow up to 60% of the value of your property with equity release, using a lifetime mortgage.

This is where you can choose not to make repayments while you’re alive. Instead the interest ‘rolls up’ and anything unpaid is added to the loan.

How much can be released is again dependent on your circumstances. These include your age, as well as the value of your property. The amount you can borrow typically increases the older you are when you take out the lifetime mortgage

Some providers might offer those with certain past or present medical conditions a larger amount.

Our accredited equity release broker Age Partnership can help guide you through the process of equity release and answer any questions you may have.