Remortgaging involves replacing your existing mortgage with a new one from a different lender or with your current lender on different terms. The primary goal is to secure a better interest rate, improve mortgage terms, or, in the context of raising capital, to release equity from your property.
What is equity?
Equity is the difference between the market value of your property and the outstanding mortgage balance. As you continue to make your mortgage repayments, your equity builds, meaning you have a lower loan to value (LTV). For example, if you took out a mortgage at a 80% LTV, after 12 months of making your repayments, your LTV may have dropped to 78%, which means the equity you hold in the property has risen from 20% to 22%.
How much equity do I need to be able to remortgage as a means of raising capital?
Remortgaging to release capital is something you should, ideally, only do if you have a sizeable amount of equity built up in the home, to the extent that doing so won't significantly impact the loan to value of the mortgage.
How does it work?
When you release equity, your loan to value (LTV) on your mortgage rises. For instance, your LTV would go from 70% to 90% if you had 30% ownership and decided to release 20%. The cost of your mortgage rises as your loan to value does. Additionally, interest rates are typically higher on mortgages with greater LTVs.
What can you use the money for?
You can use the equity you release from your property on a variety of things you may need or want. From renovations and retrofitting to helping your family to purchasing a car, subject to lender approval.
Can you use it to pay off your debts?
Mortgages can sometimes offer lower interest rates than personal loans and can be cheaper than some credit cards. Adding debts to a mortgage allows you to spread repayment over the life of the loan - potentially decades, as opposed to the five to 10 years you could get with a personal loan.
However, ensure that you've done all your research and planning before doing so. You will pay more interest in the long run if you extend the term of your mortgage.
Benefits of remortgaging to raise capital
Access to funds
Remortgaging can provide you with a potentially significant amount of capital, which can be utilised for various purposes. Whether you need funds for home renovations, education expenses, starting a business, or investing in other ventures, remortgaging can be a viable solution. Whilst there are a variety of uses for this capital, they are subject to lender approval.
Speak to a mortgage adviser to determine whether your lender would approve the reason why you want to release equity in your property.
Home improvements
By using the capital raised to improve your property, you can raise the value. Home improvements can be an excellent investment, providing both immediate comfort and long-term financial gains if you decide to sell the property.
Debt consolidation
For individuals burdened with multiple high-interest debts, remortgaging can offer a way to consolidate these debts into a single, more manageable monthly payment. When remortgaging to consolidate debt, it’s important to bear in mind that the debt will be paid over a longer time, you may pay more interest overall and you will reduce the equity that you own in your property.
Get prepared by talking to an adviser
Remortgaging to raise capital can be an effective financial strategy for homeowners seeking to unlock the potential of their property and achieve their financial goals. By accessing the built-up equity in their homes, individuals can secure funds for various purposes, take advantage of lower interest rates, and consolidate debts.
However, careful consideration of costs, monthly repayments, and personal financial stability is essential before making a decision. Speak to an expert adviser today if you want to remortgage to release some equity.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
You may have to pay an early repayment charge to your existing lender if you remortgage.
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