Unlocking the Potential of Your Property: A Guide to releasing equity through remortgaging

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At Aston James Bespoke Mortgages, we understand that your home is not just a place to live but also an investment. If you’ve paid off a significant portion of your mortgage or your property’s value has appreciated, you’ve likely built up a substantial amount of equity in your home. Remortgaging to release equity can be a viable option to access additional funds for various purposes, such as home improvements, debt consolidation, or supporting your children’s education. However, it’s crucial to carefully consider the benefits and costs associated with this financial move.

Could the equity if your home help your loved ones get on the property ladder

What Is Equity? Equity represents the percentage of your property that you fully own. It’s the difference between the outstanding mortgage balance and the current market value of your home. Equity is closely tied to the Loan-to-Value (LTV) ratio, which calculates the proportion of your mortgage debt relative to your property’s value.

For instance, if you purchased a house for £200,000 with a £150,000 mortgage and a £50,000 deposit, your LTV would be 75%, and your equity would be £50,000 (equivalent to your initial deposit). Over time, both your LTV and equity can change. If your property’s value increases to £250,000, your equity would become £100,000, and your LTV would decrease to 60%. Additionally, if you’ve paid off £10,000 of the mortgage during this time, your LTV would further decrease to 56%, and so on.

Lenders typically use your LTV to determine the interest rates when you consider remortgaging to release equity. A lower LTV, which indicates more equity, often results in more favorable interest rates.

Reasons for Remortgaging to Release Equity People opt to borrow against the value of their homes for various reasons. However, it’s essential to note that not all these reasons are equally beneficial, and remortgaging might not always be the most suitable solution. Here are some common motives for remortgaging to release equity:

  1. Home Renovations: You can use the released equity to fund essential home improvements and increase your property’s value.
  2. Funding Higher Education: Providing financial support for your children’s education can be a meaningful use of the extra cash.
  3. Assisting Children in Buying a Home: Helping your children get on the property ladder can be a rewarding endeavor.
  4. Repaying Short-Term Debts: Consolidating high-interest debts with your mortgage may lead to lower overall interest costs.
  5. Financing a New Car: This may offer greater flexibility when negotiating the price of a new car.
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It’s crucial to understand that remortgaging to release equity is essentially a form of borrowing, which means it increases your debt load and extends the repayment period compared to short-term loans.

How to Remortgage for Equity Release Homeowners often consider remortgaging for equity release when their existing mortgage deal is expiring, or when they believe they have a sufficient amount of equity and a lower LTV to secure better mortgage terms. Another option is to borrow additional funds against the property’s increased value.

Suppose your home’s value has risen significantly, lowering the LTV and increasing your equity. In that case, you can borrow more money without necessarily increasing your monthly payments. This is possible because the extra equity is derived from the property’s appreciation.

For example, if your house’s value has risen from £200,000 to £250,000, reducing the LTV from 75% to 60%, you have the option to either lower your repayment rate or maintain the same rate and borrow an extra £50,000 to maintain the LTV at 75%.

Determining the Amount of Equity You Can Release To determine the amount of equity you can release from your home, lenders will assess your financial situation and credit history according to their lending criteria. Some lenders offer online calculators to estimate your borrowing capacity, but for an unbiased evaluation, consulting a mortgage broker is advisable. Your current level of equity and your age also play a role in the lender’s decision. As you approach retirement, it may become more challenging to secure a remortgage, as lenders typically assume lower income in retirement.

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Costs of Remortgaging for Equity Release Remortgaging can involve various costs that you should be aware of. These expenses include:

  1. Early Repayment Charges: If you have an existing mortgage deal, you may need to pay early repayment charges, even after the fixed-term period ends. These charges are typically a percentage of the outstanding loan, which can amount to thousands of pounds.
  2. Exit Fee: This is a separate fee from early repayment charges. Additionally, your new mortgage may have set-up fees depending on the lender and the specific deal.

However, it’s essential to consider that even with these costs, if you secure a significantly lower interest rate, it may offset the expenses. Also, if your property’s value has substantially increased, the benefits may outweigh the extra costs.

Key Tips to Keep in Mind:

  1. Seek advice from a mortgage broker or Independent Financial Advisor (IFA) to determine if remortgaging for equity release is financially sound.
  2. Shop around for the best mortgage deals, considering your unique circumstances.
  3. Be cautious about remortgaging if your property’s value has recently declined.

Risks of Remortgaging for Equity Release It’s crucial to understand the potential risks associated with remortgaging for equity release. When you release equity, you essentially increase your loan amount. Although your monthly payments may remain the same if your property’s value has appreciated, you will end up paying back more over a more extended period.

If you borrow more than the increase in your equity, your loan-to-value ratio will rise. This can lead to higher repayments, which you must ensure you can afford, even if interest rates increase. Moreover, if house prices were to fall, you might find yourself in a situation of negative equity, where your outstanding loan surpasses the total value of your home. This can make remortgaging difficult and selling your property a challenging task.

Additionally, it’s crucial to avoid rushing into remortgaging without seeking advice. Multiple rejected applications from lenders can negatively affect your credit score. Wait until a mortgage broker is confident that your application is likely to succeed.

Alternatives to Remortgaging for Cash While remortgaging for equity release is an option, it might not always be the most convenient or cost-effective solution for accessing extra funds. Here are some alternative options to consider:

  1. Personal Loan: You can consider a personal loan, which may have a higher interest rate but a shorter repayment period, ultimately saving you money in the long run. Depending on your creditworthiness, you can borrow up to £35,000.
  2. Credit Card: For smaller financial needs, a money transfer credit card could be an option. You may enjoy a period with no interest, but