Can I release cash from my home?
The most common reason homeowners look to remortgage to a new home loan is to cut their monthly mortgage repayments.
However, some do so in order to release some of the equity they have built up in their property, which they can then put towards home improvements, repaying other debts or offering financial help to loved ones.
This guide explains what you need to know about releasing equity from your home - from the pros and cons to how to do it.
Which? Mortgage Advisers can find and arrange the best deal for you.
What is equity?
Equity is a term that refers to how much of the property you own outright. So if you bought a property with a 10% deposit, then you would own 10% equity in the property.
Usually, the level of equity you own in the property will go up as you repay the mortgage, since the outstanding debt will represent a smaller proportion of the overall value of the property.
While you might have taken a mortgage at 90% loan-to-value when buying the property, a year later that may have fallen to 88%, meaning the equity you own has increased from 10% to 12%.
However, that’s not the only way that the equity you own can increase - it will also go up if the property increases in value.
Why remortgage in order to release cash?
There are lots of different reasons you might want to remortgage in order to release some of the equity you have.
Alternatively, you might want to use some of that money to help a family member financially. Many first-time buyers now rely on financial support from their loved ones in order to get onto the housing ladder, most commonly in the form of a gifted deposit.
You may also be considering remortgaging to free up cash to pay off some debts.
How much equity do I own?
You can get a ballpark idea of how much your house is worth by researching what similar properties in your area have sold for using the Land Registry.
Alternatively, you can ask an estate agent to come over and give you an estimate. Most offer this as a free service, in the hope that you'll use them to sell your property if and when you decide to put it on the market.
Now you simply need to subtract the outstanding mortgage from the value of the property to establish how much equity you own.
Your annual mortgage statement will set out what you still owe, and you can call your lender at any time to get a more up-to-date figure.
How does remortgaging to release equity work?
Let’s say that you bought a property for £250,000 with a £200,000 mortgage five years ago. In that time the mortgage you owe has fallen to £180,000, while the value of the property has increased to £300,000.
As a result, the equity you own in the property has increased from £50,000 at the time of purchase to £120,000.
If you just wanted to remortgage to a cheaper mortgage rate, then you would look to borrow £180,000.
This works out at a loan-to-value (LTV - how the size of the loan compares to the value of the property) of 60%. That’s a significant improvement from the 80% LTV you borrowed at initially.
This is important, as the lower the LTV, the lower the interest rates mortgage lenders offer, meaning cheaper repayments.
However, you could remortgage for a larger amount than you actually owe, thereby releasing some of that equity to spend elsewhere. For example, you could instead remortgage for £200,000. That would put the loan to value at 66%.
You’d still be borrowing at a lower LTV than when you first bought, likely meaning a lower interest rate, but you also have £20,000 to spend however you like.
Use our loan-to-value (LTV) calculator to work out what your loan-to-value could be.
How much equity do I need?
Ideally, releasing cash by remortgaging is only something you should do if you have a significant amount of equity built up in the property, to the point that increasing your equity will not dramatically change the loan-to-value of the mortgage.
Interest rates are typically priced in 5% bands of equity, getting lower and lower the more equity you own.
So, a 90% LTV mortgage will be cheaper than a 95% mortgage, and an 80% LTV mortgage will be cheaper than an 85% deal, and so on.
Lenders reserve their best deals for borrowers taking out mortgages at a lower loan-to-value, typically in the 60% to 65% range.
If the size of your mortgage increases when you release cash, from being around 60% loan-to-value to 75%, you will almost certainly have to pay a higher rate of interest.
Should I remortgage to pay off debts?
Mortgages tend to offer lower interest rates than a personal loan, and are much cheaper than credit cards. Adding debts to a mortgage will allow you to spread repayment over the term of your deal - potentially decades, compared to the five or 10 years with a loan, or two years with a 0% balance transfer credit card.
However, think carefully before you do this. As you're extending your repayment period, you'll be paying much more interest over the long term.
Say you have debts of £20,000 you want to clear by releasing cash from your property. You currently have £180,000 left on your mortgage with 20 years to go, and you're paying 3% interest. Your house is worth £300,000.
By increasing your mortgage to £200,000, your monthly repayments will go up by £111. You'll end up paying £6,600 in additional interest.
If you borrowed the same amount on a personal loan, charging a higher interest rate of 8%, but repaid over five years, you'd pay £4,170 in interest.
It makes sense to look at all the alternative ways to reduce your debts before considering remortgaging to pay off debts.
The pros and cons of remortgaging to release equity
The big positive of releasing equity like this is that you unlock some money which you can put to use, whether it’s to consolidate other debts, pay for home improvements or to gift to a family member.
But remember - you are increasing the size of your loan. This is not something you should do lightly. Depending on the mortgage you go for, this may mean that your monthly payments actually go up.
You also need to remember that house prices can go down as well as up. If house prices fall sharply, that equity you have built up could quickly be eroded away, potentially even leaving you in negative equity. This is where the size of your outstanding loan is larger than the value of the property.
Being in negative equity can make it extremely difficult to remortgage or move home in the future.
Early repayment charges
You could face significant exit fees for moving from your current mortgage to the new loan. If you remortgage during the initial fixed or tracker period of your mortgage, then you will likely need to pay an early repayment charge (ERC).
An ERC is generally calculated as a percentage of the outstanding loan and so can be a significant outlay. For example, a 5% ERC on a £200,000 mortgage works out at a £10,000 penalty charge, which would erode some of the equity you could release by remortgaging.
An ERC will not usually be charged once you have finished this initial period and moved onto your lender’s standard variable rate.
In addition to the ERC, you will often have to pay an exit fee to cover the administration of closing your account. This is much smaller, usually around £100.
There will likely also be fees to consider. Many mortgages charge a product or arrangement fee just to get the loan, which will typically cost around £1,000 (though some fee-free products are available).
You can add this to the mortgage balance, though doing so will mean you pay interest on the fee, costing you far more overall.
There may also be fees associated with the legal side of the remortgage, though many lenders promise to cover these fees as part of their offer.
What are the alternatives to remortgaging?
Increasing the size of your mortgage may not be the only option available to you if you're looking to raise funds. The most straightforward option will be to use your savings since this will not involve having to arrange any additional credit.
However, if you don’t have savings in place, then a personal loan may be worth considering if you’re looking to finance home improvements. You can arrange a loan for a period of between one and five years and borrow up to £35,000.
If you need smaller sums, a money-transfer or long-balance-transfer credit card may be a better choice.
If the main reason that you want to remortgage is to help a loved one buy a property, then there are a number of other methods worth considering.
You could take out a joint mortgage with them, as your income would be considered alongside the main applicant, which may make it easier for them to borrow the required amounts.
Alternatively, you could act as a guarantor. Remember, these options will mean that you are pursued for repayments should they fall behind.
Find out more in our guide to how parents can help first-time buyers.