Remortgaging to Release Equity from Your Home: How It Works
If you’re a homeowner, you may have built up equity in your property over time. Equity is the difference between the value of your home and the outstanding mortgage balance. Remortgaging to release equity is a way to access some of that equity, by taking out a new mortgage for a higher amount than your current mortgage. In this guide, we’ll explore how remortgaging to release equity works and what you need to consider before taking this step.
What is Equity Release?
Equity release is a way to access the value of your home without having to sell it. It’s typically used by older homeowners who are looking for additional income in retirement.
There are two main types of equity release:
Lifetime mortgage: You take out a mortgage secured against your home, and the loan is repaid when you die or move into long-term care.
Home reversion: You sell a portion of your home to a third party in exchange for a lump sum or regular payments.
Remortgaging to release equity is a similar concept, but instead of taking out a separate equity release product, you take out a new mortgage for a higher amount than your current mortgage. This can be a good option if you’re looking to access some of your equity but don’t want to commit to a separate equity release product.
How Does Remortgaging to Release Equity Work?
To put it simply, it involves taking out a new mortgage for a higher amount than your current mortgage. The additional funds are then used to pay off your existing mortgage, and you’re left with the remaining amount to use as you wish.
For example, let’s say your home is worth £300,000, and you have an outstanding mortgage balance of £150,000. This means you have £150,000 in equity. If you want to release £50,000 of this equity, you could remortgage your home for £200,000. The new mortgage would pay off your existing mortgage balance of £150,000, and you would be left with £50,000 to use as you wish.
Things to Consider Before Remortgaging to Release Equity
It can be a good option if you need funds for home improvements, to pay off debts, or for any other reason. However, it’s important to consider the following before taking this step:
Interest Rates: If you remortgage to release equity, you’ll be taking out a new mortgage for a higher amount than your current mortgage. This means you’ll be paying interest on a higher amount, which could result in higher monthly payments.
Early Repayment Charges: If you’re still within the fixed rate period of your current mortgage, you may be charged an early repayment fee if you remortgage to release equity.
Fees: Remortgaging to release equity can involve a range of fees, including arrangement fees, valuation fees, and legal fees. Make sure you factor these into your decision-making process.
The Benefits
Despite the potential drawbacks, there are some benefits to remortgaging to release equity, including:
Access to Funds: Remortgaging to release equity can provide you with a lump sum of money that you can use for any purpose.
Lower Interest Rates: If you’ve built up equity in your home, you may be able to remortgage to a lower interest rate than your current mortgage, resulting in lower monthly payments.
Debt Consolidation: Remortgaging to release equity can be a good option if you have high-interest debt that you want to consolidate into a lower interest rate mortgage.
Is Remortgaging to Release Equity Right for You?
Remortgaging to release equity can be a good option if you need funds for a specific purpose and have built up equity in your home. However, it’s important to consider your individual circumstances and financial goals before taking this step.
Here are some questions to ask yourself before remortgaging to release equity:
What is my reason for wanting to release equity? Consider whether the funds you’ll receive from remortgaging to release equity will be used for a worthwhile purpose. It may be tempting to use the money for a luxury purchase or holiday, but it’s important to consider the long-term impact on your finances.
Can I afford higher monthly payments? Remortgaging to release equity means taking out a larger mortgage, which will result in higher monthly payments. Make sure you’re able to comfortably afford these payments before proceeding.
How much equity do I have in my home? You’ll need to have built up enough equity in your home to make it a viable option. Consider the current value of your property and the outstanding balance on your mortgage.
What are the interest rates like? Interest rates can have a significant impact on your monthly payments and the overall cost of your mortgage. Make sure you compare interest rates across a range of lenders to find the most competitive deal.
What are the fees and charges? Remortgaging to release equity can involve a range of fees, including arrangement fees, valuation fees, and legal fees. Make sure you factor these into your decision-making process.
Can I afford any early repayment charges? If you’re still within the fixed rate period of your current mortgage, you may be charged an early repayment fee if you remortgage to release equity. Make sure you factor this into your calculations before proceeding.
How will it impact my long-term financial goals? Consider the impact that it might have on your long-term financial goals, such as retirement planning and savings.
Final Thoughts
Remortgaging to release equity can be a good option if you need funds for a specific purpose and have built up equity in your home. However, it’s important to carefully consider your individual circumstances and financial goals before taking this step.
Make sure you compare interest rates across a range of lenders and factor in any fees and charges. At Aspire Financial Advisers, we can help guide you through the remortgaging process and find the most suitable deal for your needs. Contact us today to find out more.
| Approver Quilter Financial Services Limited & Quilter Mortgage Planning Limited. 26th May 2023 |
