If you bought your property several years ago, you may have built up equity. This is capital that’s tied up in your property, and if you aren’t planning to sell anytime soon then a remortgage to release equity can be useful. The equity people release is often used to make home improvements, consolidate debts or they remortgage to purchase of another property. Whatever your reasons for needing to raise capital, a remortgage to release equity may be an excellent option for you.
Never rush into the decision to remortgage to release equity. It’s a big financial decision that should not be taken lightly. The help of an experienced adviser could be invaluable as they can assess your financial situation to ascertain whether a remortgage is viable. Think Plutus specialises in remortgages and we can guide you through every stage of the process from beginning to end.
If you are considering remortgaging the home you live in, we strongly urge you to take advantage of the experience and expertise of our mortgage advisers. All mortgages commitments are for the long term so professional insights can ensure you make the right decisions. When you release equity, your monthly repayments will probably go up, so you will need to search for affordable deals before committing to a decision.
What is equity?
There’s no need to be confused about equity – it’s actually very simple to work out. Equity is defined as the value of the share you own in your property, minus the remaining mortgage balance left to pay. Let’s look at a simple example:
Current property value: £200,000
Mortgage balance: £100,000
If the property has increased in value, you are likely to have more equity:
Property bought for: £300,000
Mortgage balance: £200,000
Current property value: £350,000
If a property decreases in value, homeowners can be left in ‘negative equity’. This is not a desirable position to be in, and would make a remortgage impossible as there is no equity there to release. Here’s an example:
Property bought for: £200,000
Mortgage balance: £175,000
Current property value: £150,000
There are two ways for equity to be accumulated. First, it is built up when the value of the property increases. It also increases as your mortgage is repaid over time. As you make your mortgage payments, your remaining balance goes down, resulting in an increase in the amount of equity available. If we take the negative equity example above, the equity can begin to accumulate once the mortgage balance drops below £150,000 (as long as the value of the property doesn’t decrease further). So, if the value remained the same, then once the outstanding mortgage balance went down to £125,000, there would be £25,000 of equity.
Once equity has been accumulated, it can be released either by remortgaging or by selling the property.
How to remortgage to release equity
The term ‘remortgage’ essentially describes the process of replacing your existing mortgage with a new one. Sometimes, homeowners choose to remortgage in order to switch to a better deal. This will mean the outstanding balance remains the same, provided no equity is released.
Remortgaging to release equity is a little different. If you aim to release the equity you’ve built up, the new mortgage deal you take out will have to be larger than your current remaining mortgage balance. So if your property is worth £300,000 and you have an outstanding mortgage of £200,000, you could release £50,000 of equity by taking out a new mortgage of £250,000.
When you do this, your new lender pays off the remaining mortgage balance with your previous lender. The additional funds go to you. Lenders do not grant a remortgage to the full value of a property as this would amount to a 100% mortgage. You have to leave an amount of capital in the property, just as with a deposit when you buy a new home.
Would a remortgage to release equity be good for me?
If you need money for any reason, a remortgage is just one option, and not always the best one. If, for example, you are on an excellent mortgage rate, the current rates available may not be as good. Anyone lucky enough to have an unbeatable mortgage rate may find that a remortgage is not the most viable way to raise capital. If you need some money urgently, but don’t want to sacrifice your current mortgage deal, it may be better to seek a secured loan.
Releasing equity generally means committing to a larger mortgage than your current one. The result is that monthly repayments go up and the length of time it will take to clear the outstanding mortgage balance increases. A remortgage is a significant financial commitment, so you should not rush into any decision.
The first thing to do is to calculate the approximate amount of equity that would be available to you. Estate agents usually offer free market valuations to provide an indication of how much your property is currently worth. This will enable you to calculate the approximate equity you have, as you can compare that valuation to your outstanding balance. Be sure to get clarification about any remortgage fees or costs associated with a formal valuation as companies vary on this. If you do commit to applying for a mortgage, your lender will carry out a survey to establish a valuation of your property.
All cases are different, so you can enquire with a Think Plutus adviser anytime. We can assess your circumstances to advise on whether or not a remortgage to release equity is viable for you. Note that Think Plutus is a whole of market mortgage broker, meaning we have access to deals that are not available to the general public. Our input can ensure you get the very best deal possible, so feel free to get in touch and tell us about your circumstances. For reliable advice on remortgaging to release equity, Think Plutus.