Unlock Your Home's Equity: A Remortgaging Guide

Remortgaging to access home equity is a popular financial strategy among homeowners seeking to tap some of the wealth tied up in their property. This article explores what home equity is and how remortgaging works.

Home Equity

Your home equity is the difference between the current market value of your home and the principal amount that you still owe on your existing mortgage. For example, if your home is worth £300,000 and you have a balance of £150,000 remaining on your mortgage, your home equity is £150,000 (£300,000 - £150,000).

Accessing Home Equity

Accessing home equity refers to the process of unlocking some of the equity in your home in the form of cash. This can be done through various means, such as taking out a second charge mortgage or a home reversion plan (available to those over 60), with remortgaging being one of the most common. The funds that are accessed can be used for various purposes, such as home improvements, purchasing another property or paying off debts. Continuing with the above example, if you remortgaged your home worth £300,000 and obtained a larger mortgage of £200,000, you would apply £150,000 to repay the existing mortgage and receive £50,000 as cash.

Can I Remortgage to Access Equity and How to Do It?

Remortgaging Explained

Remortgaging involves replacing your current mortgage with a new one. This is usually with a new lender. When you remortgage to access home equity, you borrow more than your current mortgage balance, so that the additional amount can be given to you as cash.

Steps to Remortgage to Access Equity?

1. Evaluate Your Equity: Determine how much equity you have in your property by estimating its value and subtracting your outstanding mortgage balance from that value. Sales data from the Land Registry and online listings for comparable properties are usually readily available for being able to estimate value. However, this is not a substitute for a formal valuation by a surveyor that a lender will ultimately require.

2. Check Eligibility: Ensure you meet the lender's criteria for remortgaging, which typically includes factors such as your credit score, income, and the value of your property and loan-to-value (LTV) ratio.

3. Compare Deals: Shop around for the best remortgage deals. Use online information, including comparison tools, and consider consulting a mortgage broker for professional advice.

4. Apply for Remortgage: Once you find a suitable deal, apply for the remortgage. The lender will conduct an assessment, including a valuation of your property and a review of your financial situation.

5. Complete the Process: If you are approved and accept the loan terms, the new loan will be used to pay off your existing mortgage and the additional funds, i.e. the equity that you are accessing, will be transferred to you.

Example of Equity Value Build Up and Accessing It?

Suppose you purchased your home for £200,000 with a 20% deposit (£40,000) and a repayment mortgage of £160,000 ten years ago. Assume that, since then, you have repaid £50,000 of the mortgage and the property's value has increased to £250,000. Your current equity would be:

- Current Property Value: £250,000

- Mortgage Balance: £110,000 (£160,000 - £50,000 repaid)

- Equity: £140,000 (£250,000 - £110,000)

If you decide to remortgage and access £50,000 of equity, you would need take out a new mortgage of £160,000 (£110,000 existing mortgage balance + an extra £50,000). The extra £50,000 would be given to you as cash.

How Much Equity Can I Access?

Loan-to-Value Ratio

The amount you can access will depend on the loan-to-value (LTV) ratio that the lender is willing to offer, as well as your credit status and financial situation. Most lenders have a maximum LTV ratio for remortgaging, usually around 75-85%.

Other Factors

- Property Value: Higher property values generally mean you can access a greater amount of equity with the same LTV ratio.

- Existing Mortgage: Likewise, the lower your outstanding mortgage balance, the more equity you could potentially access with the same LTV ratio.

- Lender Criteria: Different lenders have different criteria and LTV limits.

- Financial Status: Your credit score income and overall financial health will also influence how much you can borrow.

Overview of the Remortgage Market

Remortgaging forms an important part of the residential mortgage lending market. Based on the Bank of England’s mortgage statistics as of 11 June 2024 (mlar-statistics-detailed-long-run.xlsx (live.com)), the total amount of new residential lending to individuals in the first quarter of 2024 was £51.57BN. Of this, £16.41 BN, representing 31.82%, was for remortgaging. Just over 90% of the remortgaging was with a new lender rather than the existing one. The quarterly amount of new residential lending to individuals during the whole of 2023 was, on average, £56.27BN per quarter. Of this, £17.58 BN, representing 31.25%, on average, was for remortgaging. Again, just over 90% of the remortgaging was with a new lender rather than the existing one.

People remortgage for a variety of reasons, such as extending the term of their mortgage or securing a lower short term interest rate, but a common reason is to access their home equity.  

Remortgaging to access equity in your home is a viable financial strategy for many homeowners. It allows you to access the wealth built up in your property without selling it, providing funds for various needs such as home improvements, debt consolidation or making an investment. Understanding the process, from evaluating your equity to finding the best remortgage deals, is crucial to making informed decisions.

FAQs:

Q. What is remortgaging to access equity?

A. Remortgaging to access equity involves replacing your current mortgage with a new one and borrowing more than your existing mortgage balance. The additional funds are given to you as cash after the existing mortgage balance has been repaid. These funds can be used for various purposes, such as home improvements, debt consolidation or making investments.

Q. How much equity can I access through remortgaging?

A. The amount of equity you can access depends on factors such as the current value of your property, your outstanding mortgage balance and the new lender’s loan-to-value (LTV) ratio criteria, as well as the lender’s assessment of your credit standing and financial situation. Subject to such factors, lenders may allow up to a 75-85% LTV upon a remortgage. Thus, for example, suppose your property is worth £250,000 and your current mortgage is £150,000. If the new lender you are remortgaging with offers a new 80% LTV loan, your new mortgage amount will be £200,000 (80% of £250,000). Subtracting your existing mortgage balance (£150,000) from this amount will give you the equity you can access (£50,000).

Q. What are the costs involved in remortgaging to release equity?

A. Costs associated with remortgaging can include arrangement fees, valuation fees, legal fees and potentially early repayment charges, if the current short term rate on your existing mortgage is a fixed rate and you are remortgaging before its term ends. It is important to factor in such costs when considering remortgaging.

Q. Can I remortgage if I have a poor credit history?

A. Remortgaging with a poor credit history can be challenging, but not impossible. Some lenders specialize in offering mortgages to individuals with less-than-perfect credit. However, the terms may not be as favourable. The interest rate could be higher and you might not be able to access as much equity as you might want to. It may be advisable to consult a mortgage broker for tailored advice.