Remortgaging to release equity – is it a good idea?

After house prices rose by 10% on average last year, remortgaging to release equity looks tempting
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  • More than 15 million homes rose in value by £15,000 or more in 2021, according to Zoopla. If you’re one of the lucky homeowners whose property has rocketed in value, should you consider remortgaging to release equity?

    What does remortgaging to release equity mean?

    Remortgaging means to replace your old mortgage with a new one. The most common reason is because your mortgage deal is about to expire and you want to switch to a new low interest rate.

    You can stay with the same lender or switch to a new lender if they’re offering better rates.

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    When switching to a new deal, lots of homeowners decide to unlock some of the equity they have built up in their homes at the same time.

    Equity is the portion of the house that you own, which is the difference between your mortgage balance and the value of your property.

    How does it work?

    Let’s say your current mortgage debt is £150,000. Over time your home has risen in value to £300,000 which means you have £150,000 of equity. You would like to release £50,000 of your equity with an equity release mortgage.

    To do so, you would apply for a remortgage of £200,000. Once your new loan is approved, £150,000 is used to repay your old mortgage leaving you with £50,000 in cash left over to spend. Your new mortgage balance is £200,000 and you have a remaining £100,000 in equity still in your home.

    ‘Before a lender agrees to give you a remortgage it will want to be sure there is enough equity in your home to allow you to borrow a proportion of it so you may need to have your home valued,’ says Richard Campo, managing director of brokerage Rose Capital Partners.

    ‘The lender will also carry out affordability and credit checks to make sure the new loan is affordable to you,’ he adds.

    Why do some homeowners turn to remortgaging to release equity?

    Why would you want to increase the size of your mortgage debt instead of paying it off?

    The rapid rise in house prices over recent years has left millions of homeowners sitting on tens of thousands of pounds in equity, perhaps at an earlier stage in their lives than they had expected.

    Meanwhile, mortgage interest rates have dropped to record lows which has made remortgaging a cheap and accessible way to borrow money compared to using credit cards and personal loans.

    That’s why releasing equity to pay for large projects such as home improvements or renovations is so popular.

    Consolidating more expensive debts on to your mortgage which will reduce your monthly expenses is also another common reason homeowners unlock equity.

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    Dominik Lipnicki, director of Your Mortgage Decisions, says borrowers should take mortgage advice before consolidating unsecured debts such as credit cards and personal loans with their mortgage because it is secured against their home. If you fail to pay your mortgage your home could be repossessed by the bank.

    ‘Any debt refinancing needs to be considered on its own merits and with care,’ explains Dominik.
    ‘Each debt arrangement to be consolidated should be calculated, including the total amount to pay back, to ensure that it is in the borrower’s interest to refinance it within a mortgage.’

    How will it affect your mortgage repayments?

    If your home has risen in value considerably since you took out your mortgage you may find that you can remortgage to a lower interest rate. This could lessen the impact of increasing your debt or even keep the cost the same.

    The interest rate you’re offered depends on how high the balance of your mortgage is compared to your home’s value – known as loan to value (LTV).

    Let’s say you first took out a 90% LTV mortgage. When you come to remortgage your loan to value has reduced to 70% because of property price rises and repayments you’ve made. You may now be offered a cheaper interest rate even after releasing equity.

    Extending your mortgage term is another way to keep your repayments from rising.

    Pros and cons of remortgaging to release equity

    Pros

    • By turning your equity into cash, it can be used for lots of reasons
    • Borrowers with a good credit rating and lots of spare equity can borrow cheaply

    Cons

    • You might be charged a penalty to repay the old mortgage
    • You are increasing the size of your mortgage debt
    • Your home may be repossessed if you can’t make your repayments
    • Consolidating short-term debts can be risky and expensive
    • You interest rate could rise if your LTV increases or if you credit rating has worsened since your last mortgage

    Is it a good idea?

    That depends on your circumstances. Do your research first to see if there is a cheaper way of borrowing the money.

    Mortgages are long-term commitments. Over time you could pay back more interest than if you borrowed money over a shorter term.

    Take mortgage advice before consolidating any debts onto a mortgage.

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