How does remortgaging to release equity work?
Remortgaging to release equity is where you borrow money against your property using your available equity. This is the difference between how much of your property you actually own versus the mortgage you still need to pay off. As an example, if you have £150,000 remaining on your mortgage, and your property is now worth £300,000 (increased from its original value of £200,000), the equity you hold in your home is £150,000. The market value of your property minus any outstanding mortgage on it is known as the loan-to-value (LTV) ratio. Taking the above example, an equity of £150,000 would be an LTV of 50%. So when coming towards the end of your current mortgage deal, you could remortgage for more than this amount (£200,000 for example), which will allow you to release £50,000 of equity to spend how you wish.What is the downside to equity release?
As with any mortgage product, remortgaging to release equity does have some disadvantages you need to consider. These include:- You are taking on more mortgage debt - should you miss any monthly payments, your home could be at risk of repossession.
- If you are rejected by multiple lenders, your credit score could be affected.
- There is no guarantee that house prices will continue to rise, which means you could be left in negative equity if prices fall significantly. This is where your loan is bigger than the value of your home.
- There may be early repayment charges.
Will I be eligible?
Most lenders have an eligibility assessment they use to determine if you are suitable to remortgage to release equity. Eligibility is based on the following factors:- Your credit history
- Employment status
- Income
- The amount of equity you currently have
- Type of property
- Your age
Alternatives to remortgaging for equity release
After discussing your options with a mortgage broker, you might find that remortgaging to release cash isn’t for you. Here are some alternatives worth considering:- Using your savings
- Personal loan - if you’re looking to make home improvements, you can arrange a loan for a period of between one and five years and borrow up to £35,000.
- If you’re remortgaging to help your child or a loved one purchase a property, then you could take out a joint mortgage. Your income would be considered alongside the main applicant, which may make it easier for them to borrow the required amounts.
- Or you could act as a guarantor. So if your loved one falls behind with their repayments, the responsibility then lies with you.
