Releasing equity

Your house is not just a home, it’s a valuable financial asset that you have invested into over years. Realising that investment and releasing equity from it in order to finance other things is a good use of a home and is easier than many people realise.

Remortgaging is the standard way to do so. A remortgage is a secured loan on your house that is for a purpose other than purchasing it in the first place. In almost every sense, it is similar to your original mortgage, with a regular monthly repayment and competitive interest rate.

Can I remortgage my house if I still have an outstanding mortgage?

Yes. There are two options in this instance. One is to take out a full remortgage that swaps with your original mortgage (paying it off and replacing it), the second is to have a second charge remortgage in addition to the main mortgage – often simply called a property secured loan.

In order to remortgage your house, you must have positive equity in the property.
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What is equity?

equity
Equity is the value of your property minus the amount of debt secured upon it. If, for example, you had a £200,000 house with £80,000 of mortgage remaining to pay, then you would have £120,000 in equity. This would also be considered 60% equity (as £120,000 is 60% of £200,000).

A house with an outstanding mortgage and a second charge remortgage would require both to be considered to determine equity. Thus, a £300,000 house with a £100,000 mortgage and £40,000 secured loan (second charge remortgage) would have £160,000 equity (54.34%).

Negative equity occurs if the value of the property drops below the total amount of debt secured on it.

Releasing equity is the term given to securing a loan on your property to provide you with usable money rather than it being tied up in the home.

Can I remortgage and release more equity?

Remortgage
If you have 100% equity in your home (you own it all and have no mortgages or loans secured on it), then you will be looking to get a standard remortgage to release equity on it.

Full remortgage with extra borrowing
If you already have a mortgage, then you can release more equity with a full remortgage with additional borrowing that replaces your remaining original mortgage as well as increasing the size of the loan for some equity release.

Second charge remortgage or secured loan
If you still have some remaining mortgage, you could look at a second charge remortgage to release built up equity.

How much money can I get through an equity release mortgage?

The amount of money you can raise is going to depend on the following:
  • The value of your property
  • The level of equity you have in it
  • Your income and affordability
  • The purpose for your loan

Value and equity

Most mortgage lenders will limit the loan to value (LTV) ratio of a remortgage to 75% of the house value. There are specialist companies, however, who will look at 85% and even 90% LTV remortgages.

Examples (these are simplified and do not consider any fees or legal costs):

A home valued at £420,000 with no outstanding mortgage or debt would provide enough security for a loan up to £315,000. A £250,000 property with a current mortgage balance of £60,000 would finance a full remortgage of £187,500. £60,000 of this would be used to clear the current mortgage, leaving a final equity release of £127,500.

A property worth £180,000 with an outstanding mortgage of £90,000 would be able to secure a second charge mortgage up to £45,000.

A £200,000 house still tied to £160,000 worth of mortgage would be unlikely to be able to release any equity without a higher LTV specialist lender.

Income and affordability

Just like a standard mortgage, your income and affordability have a large impact on the maximum size of your loan. With a remortgage, the limit is typically four times your total salary (including bonuses), though some lenders offer 5x and rarely 6x.

Examples:

The home value, positive equity and LTV of 75% indicate a potential remortgage value of £180,000. However, with a salary of £28,000 the total loan cap means the actual loan offer is only £112,000.

An annual salary of £55,000 including bonuses would have a cap of £220,000, but if the property value is only £200,000, a loan total of £150,000 would be offered.
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The purpose of your loan

home-extension-plans
Refinancing your house to release equity, you will be asked the reason for the loan. This is very important to lenders as they want to know the money is not putting them at risk. One example of this is if you want to use the money to invest in a new business that you plan to undertake – with no guarantee of success, you could end up defaulting on the remortgage.

Generally, the purpose for your loan could mean a fluctuation in the final LTV amount of the mortgage, with lenders offering higher amounts for loans that will improve your property and their investment, and lower amounts for more frivolous spending.

Examples of high LTV reasons:
- Home extension
- Buying final share of shared ownership
- Buying extended lease for leasehold or share of freehold
- Buying land to improve property
- Purchasing a second home

Other factors that will affect your loan eligibility and value

There are some other factors that could affect your remortgage application, either resulting in a lower LTV offer, or rejection. You may need a specialist lender – thankfully, at The Mortgage Hut we work with a huge range of lenders and our expert advisors know where to go to find a deal for you. If you are concerned about any of the following, give us a call! 

Your age.
Many lenders won’t consider applicants over 75, others are more flexible and work to 85 or higher. You may like to consider a lifetime mortgage as an alternative to remortgaging.

Employment.
Like any loan, lenders are keen to know that you are in stable employment and will be able to pay back the remortgage. Different lenders have their own criteria, and some will consider lending to the self-employed or retired people, while others are stricter.

Your credit history.
If you are suffering from bad credit, then you may need a bad credit mortgage provider. Many issues can be resolved, from simple late payments and poor overall credit score through to periods of insolvency.

Large loans.
If your remortgage is for a value of £500,000 or more then there are often different rules for lenders that must be followed.

The quality of the property.
If the property is not a standard build, or if it is suffering from damage, then your mortgage value will be affected.

The age of the property.
Like the build quality, the age of the property can be a determining factor.

The location of the property.
If your house is on a flood plain or low coastal area, this will influence your loan application.

Advice from The Mortgage Hut

If you are looking to release some of your investment in your house, then we can help. For detailed advice and a no-obligation quote, fill in our contact form or give us a call for a chat!

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