As your mortgage keeps diminishing with every payment you make, have you ever wondered if you could utilise the portion you’ve already paid for?
As it turns out, yes, you can. By acquiring a remortgage to release equity, you can acquire a new mortgage on the fraction that belongs to you. The loan can help you offset an emergency loan or fund a holiday.
In this article, we provide advice on remortgaging to release equity, its pros and cons, and a step-by-step guide on acquiring one.
Remortgaging to release equity refers to obtaining another mortgage to pay off the old one and release funds linked to the portion of the home you have already paid for.
Releasing equity on a home is only typically available to people above 55 years.
The primary difference between equity release and refinancing is that equity release does not require monthly payments.
Remortgaging to release equity lets you borrow higher amounts than personal loans.
Releasing equity through remortgaging is like any other loan, so it’s tax-free.
It typically takes around 4 to 8 weeks to release equity when remortgaging.
What is equity release?
Equity release refers to a specific kind of mortgage available to those aged 55 and above who have either retired or left the workforce and thus no longer qualify for a traditional mortgage.
You can borrow money against your home through an equity release mortgage, but you won’t have to repay the loan in your lifetime. Instead, the title to your property will revert to the lender once you pass away.
Before we dig deeper into it, let's start with the basics.
What is equity?
Equity is the portion of your property you own outright; the profit realised if you sold the property and paid off your outstanding mortgage. For instance, if your home is worth £400,000 but still has a subsisting mortgage of £250,000, you have £150,000 in equity.
As you pay off your mortgage, your equity in the property usually increases because the debt you still owe reduces relative to the property’s total worth.
What is remortgaging?
Remortgaging is the process of getting another mortgage on the same property. You can renegotiate terms with your present lender or find a new one. The deal also lets you keep your current home while using its equity to pay your mortgage.
What is the difference between releasing equity and remortgaging your house?
If you want to get your hands on some cash and you have some equity in your property, you have two options: either remortgage or get an equity release plan.
The major difference between equity release and refinancing is equity release does not require monthly payments, whereas remortgaging does.
Paying a substantial portion of your mortgage builds up equity, so remortgaging to release equity is a way to access that cash.
You may want to remortgage to release part of your equity for various reasons. For example, you can utilise that money to support family members, take holidays, boost your retirement income, start a business, fund home improvements, or repay debts.
Risks & Benefits Involved
Just like any borrowing, releasing equity has benefits and risks, but they may only apply to you depending on some situations.
- Access to a large sum of money – Remortgaging allows you to borrow against the equity in your home to release a lump sum of cash. It can give you the money to cover significant but essential expenses like home improvements, debt relief, or tuition.
- Supplements retirement income – If your retirement savings are low, you might consider remortgaging to release equity to maintain your standard of living, cover healthcare expenses, or other financial needs.
- Providing financial support – You can also use the equity released to support family members financially, help settle expenses like education, home purchases, or act as a safety net in tough times.
- Higher interest rate – The longer the term, the more interest you will pay overall, even though the interest rate is lower than what you would get with a personal loan.
- Higher mortgage rates – Remortgaging might result in higher mortgage rates than your current mortgage, depending on your current interest rates and financial state.
- Arrangement fees – While some fee-free options are available, many mortgages charge arrangement fees that generally cost around £1,000 just to obtain the loan.
- Lower property value – There is no assurance home prices will keep going up, and a drop might leave you with negative equity, i.e., a loan that’s more than your property’s value.
- Maintaining the home – When you remortgage to release equity, maintenance, repairs, and general home upkeep becomes your responsibility.
- Potential impact on state benefits – A lifetime mortgage may affect your eligibility for certain means-tested state benefits such as Pension Credit, Universal Credit, and Council Tax Reductions.
- Inheritance issues – Equity release can reduce the amount of money you want to leave your heirs and, in some situations, can even wipe out the money you could have gotten by selling the house outright.
How does it work?
Unlike acquiring a mortgage to purchase, you already own the property under a remortgage to release equity scheme and have probably repaid a good amount of the mortgage.
Before a lender allows you to remortgage, they usually require you to build up substantial equity on the property.
Equity release lets you borrow money based on how much the property is worth yet continue living on the property. You can do this in two ways.
Home reversion – This involves selling a portion or all of your home in exchange for a flat sum. Since the lender gives you free housing for the rest of your life, the lump sum won’t reflect the property’s fair market value (usually 20%-60% of the market value). The older you are, the likelier you will receive a bigger percentage. A reversion policy provider will recover their cash by selling your property after your death or when you move to long-term medical care.
Lifetime mortgage – You secure the loan but don’t have to repay it until death or go on long-term care. Applies to people over 55 years. You can pay the interest on the loan over time or in a lump payment at the end. The lender will chalk off the loan when you or the last surviving property owner (whoever owns the residence at the time of death or permanent residency in a care facility) repays the loan. Otherwise, they usually repossess the house and sell it to recover their money.
Here is a step-by-step guide to how remortgaging to release equity typically works:
Step 1: Calculate your equity
Step 2: Calculate your loan-to-value (LTV)
Step 3: Prepare the necessary documentation and review your credit reports
Step 4: Consult an expert remortgaging broker
Step 5: Apply
How much equity can I release?
The majority of banks and financial institutions will accept applications for remortgages. Since each has different eligibility requirements, finding the best lender to approach will depend on your situation.
The following factors will affect how much equity you can release through remortgaging:
LTV ratio – Understanding your property’s LTV is crucial if you consider remortgaging to release part of the equity in your property. LTV maximums for most lenders range from 75% to 85%.
Salary – You must prove that you can make payments after leaving your job if you plan to borrow money for retirement.
Property value – The value of your property determines the amount of equity you can release. In most cases, a higher property value indicates more available equity.
Purpose – When you remortgage your home to release the equity, you need to explain why you need the money. Lenders must have assurances that their money is safe before expending any funds.
Age and health – When establishing the maximum amount of equity to release, certain equity release plans, like lifetime mortgages, may consider factors like age and health.
How long does it take to remortgage and release equity?
The time it takes to remortgage and release equity depends on your chosen product and use case but typically takes 4-8 weeks to complete. If you want reasonable rates and to avoid paying early repayment charges (ERC), you can remortgage at the end of your mortgage term.
The process might move along more quickly if you have all your details, your credit report is in order, and you hire a competent solicitor and surveyor. It also helps to have a remortgage broker on speed dial.
What will happen to my mortgage repayments?
Remortgaging to release equity can significantly affect your mortgage payments in the following ways:
Increased borrowing – Remortgaging to release equity means taking out more debt against your home and increasing your mortgage payments. Due to the higher loan amount, you must make more monthly payments to cover the additional borrowing costs.
Higher interest rates – You can either renegotiate the current mortgage’s terms or switch to a new lender. It could mean paying much higher interest than your original mortgage, which results in higher overall borrowing expenses.
Extended mortgage terms – When you remortgage to release equity, you may need to extend the mortgage term to account for the additional borrowing. This gives you more time to repay the loan and means you will make payments for a longer total period.
Yes, even with serious credit issues, you can secure a remortgage to release equity. The house provides financial security, so a low credit score is not a deal breaker.
However, this does not imply that remortgaging with bad credit is simple. You will have to shop around for a suitable lender who might charge higher than average interest rates.
When can I remortgage to release equity?
Remortgaging to release equity will give you access to previously locked funds in your home. You can use the funds for anything the lender deems appropriate, such as:
Starting a business – Obtaining business financing, especially a new one, might be challenging. You might need a financial injection to start or expand your business, and you can get it by remortgaging your home and releasing the equity as funding.
Support your family – Many first-time buyers rely on financial assistance from family and friends to acquire their first home. You can use the money to fund their home deposit. Alternatively, utilise the cash to pay their college fees.
Home improvement – You may need a new kitchen, extension, or house renovation. Releasing equity through a remortgage may be cheaper than using credit cards to fund the project. Ultimately, this could boost your home’s worth and, with it, your equity.
Repay debts – Consider remortgaging to release equity to consolidate your debts since mortgage interest rates are typically lower than bank loans, credit cards, and other forms of credit.
Remortgaging to release equity is a significant financial decision you must consider and plan for carefully before execution.
It’s not unheard of for your lender to repossess the home if you cannot keep up with the required monthly payments. Therefore, consult a knowledgeable financial adviser to help you make the right decision.
Unbiased has an excellent network of mortgage and financial advisers – its service can quickly find you the right kind of assistance in a few easy steps, regardless of how complicated your circumstances are.
What should I consider before releasing equity?
Never rush into a remortgage for cash without considering factors such as:
Inheritance – Releasing equity might significantly lower the estate you intend to leave your loved ones. Since a lifetime mortgage doesn’t end until after death, the interest accrues until the property sale.
More debt – The hallmark features of releasing equity is higher interest rates and a larger mortgage balance if you borrow money before you’ve paid off your property. This can result in an extended repayment period and, ultimately, higher interest rates.
Savings – Personal savings are the most reliable and risk-free way to get what you want without incurring punitive charges.
Early repayment charges – You may be subject to early repayment charges if you remortgage while your mortgage is still under its fixed-rate period. ERCs can reach up to 7% of your mortgage’s total value.
Alternatives to remortgaging to release equity
There are other ways you can raise money besides remortgaging. Below are some options to consider.
Personal loan
Personal loans may have a higher interest rate than a remortgage, but you will have a much shorter period to repay the loan, which could save you money.
Borrowing limits often range from £25,000 to £50,000. Before taking on a substantial loan, you should be confident in your ability to repay it.
Joint mortgage
Some mortgage companies have joint mortgage options that allow you to help your children or grandchildren get a foot in the housing market. These look at your and your child’s or grandchild’s income levels to determine eligibility.
You might also consider a guarantor loan, in which you would be responsible for making payments if they cannot. Remember that you risk losing your home if you can’t keep up with the mortgage payments.
Credit card
A money repayment credit card may be an option if you only need a small sum of money fast. It’s important to remember that while there may be an initial period where the lender won’t charge interest, the rate will rise, and you will need to pay the debt in full to avoid penalties.
Downsizing
You can consider downsizing if you want to maintain a comfortable standard of living without releasing equity or taking out additional loans. Downsizing can provide you with cash without relying on equity release, and if you buy a smaller home outright, you will still have 100% ownership.
However, beware of expenses associated with relocating, such as hiring movers, cleaning services, storage, and conveyancing services.
The Bottom Line
Releasing equity often means taking on a larger mortgage than you currently owe. It represents an increase in monthly repayments and can extend the duration of your mortgage term. A remortgage is a financial commitment you shouldn’t rush into.
