What Does it Mean to Remortgage?
Remortgaging refers to the process of taking out a new mortgage on the same property. As you will have likely paid off more of your mortgage by the time you remortgage, you may be able to get a lower interest rate with a new lender, or with your current one, with the equity you have built up in your home acting as security. By remortgaging, you are avoiding moving over to your lender’s standard variable rate (SVR) which is often much higher. Remortgaging to release equity allows you to borrow more than your current outstanding mortgage balance, meaning this extra amount can be taken out as cash to use for whatever purpose you need.Why Release Equity from Your Home?
Remortgaging to release equity from your home is just another form of borrowing money, which ultimately means it puts you further into debt on your mortgage. The equity in your home is the difference between the amount you have left to pay on your mortgage and the property’s market value. For example, if you buy a house for £200,000 with a £150,000 mortgage and a £50,000 deposit, the LTV is 75% and your equity is £50,000. There are many reasons for choosing to release equity in your home, including:- Starting a business.
- Repaying short-term debts.
- Home renovations.
- Helping children onto the property ladder.
- Extra retirement income (there is a specific form of borrowing this falls under called equity release for retirement)
How to Remortgage and Release Equity in My Property.
Homeowners most often consider borrowing more money against their property if their homes have risen significantly in value, lowering their LTV and increasing their equity. This means that it’s possible to borrow more money without necessarily increasing monthly payments, as the extra equity has come from an increase in the property’s value. For example, if your house has risen in value from £200,000 to £250,000, the LTV will have changed from 75% to 60% which means you could either get a lower repayment rate or keep the same repayment rate and borrow the extra £50,000 to keep the LTV at 75%. Remortgaging Costs. If you haven’t come to the end of your current fixed-term deal, early repayment charges are possible, which is typically a percentage of the outstanding loan. You could also pay exit fees and set-up fees, depending on your lender. However, if you can get a much lower interest rate, it may counteract these costs, especially if your home’s value has increased a lot. Risks of Remortgaging to Release Equity. Remortgaging to release equity increases your loan and can result in higher repayments, especially if you borrow more than the amount your equity has increased. There is a risk of landing in negative equity, whereby your outstanding loan is larger than the total value of your home, making it difficult to remortgage or sell up. It’s worth noting that remortgaging will cost you more in the long run because you’ll owe interest on a larger sum. How Much Equity Is It Possible to Release? Firstly, a lender will want to check over your finances and credit score to calculate the best offer based on their lending criteria. This offer will depend on how much equity you currently own and your age will also be a factor since the age limit for a new mortgage is 65. All of this information will be used to determine how much extra you can borrow.What are the Alternatives to Remortgaging?
If the above seems like too much of a risk for you, there are other lending options available, including:- Credit Card – useful for smaller amounts and you may be able to pay no interest for a period of time.
- Personal Loan – you have the option to pay over a shorter time period, but the interest rates may be higher.
- Joint Mortgage – this is possible if you want to help your children get on the property ladder. A joint mortgage offers the potential to borrow more by taking into account the incomes of both you and your child.
