How to release equity when remortgaging

When you want to invest in a business, find money for major repairs or renovate your existing home, releasing equity from remortaging your house is a possibility. This handy guide explains what it means to release equity and outlines important elements you need to consider before remortgaging your home.

What is Equity?

Equity is the value of a property that you own outright, after deducting the amount you owe on your mortgage. For example, if you purchased a property for £350,000 and put £50,000 down as a deposit, your mortgage would be for £300,000. This means that the equity in the property is £50,000.

How do I Increase the Equity on my Home

This amount of equity in your home can grow in two ways. Firstly, the value increases over time as you gradually reduce the debt on a repayment mortgage (NOTE: This is not the case for an interest only mortgage). Secondly, the property can increase in value. For example, if your property increases in value by £50,000 and you have gradually reduced your mortgage by £10,000, your equity in that property would be £60,000. The equity available to you is the money in your home less your outstanding mortgage.

How do I Release Equity in my Home?

Equity can be released by selling your home or by remortgaging. With the sale of your property, the mortgage can be repaid and the remaining lump sum is released. If selling is not an option, equity can also be released by remortgaging your home. This involves borrowing more than what is owed on the existing mortgage to release a lump sum.

For example, if your property has increased to £300,000 from the original price of £200,000, and you have paid off £10,000 through regular monthly repayments, the equity in your property would be £110,000 (£100,000 plus £10,000) and the amount owed on the current mortgage would be £190,000. By remortgaging you can borrow more than what is owed as you have £110,000 equity in the property. By taking out a mortgage for £240,000, the first £190,000 pays off the original mortgage, leaving you with £50,000 as a lump sum. You also have £60,000 equity still in the property following this transaction.

What to Consider when Releasing Equity by Remortgaging?

The main benefit of releasing equity by remortgaging is that you will have a lump sum at the end of the process; however, there are a number of things to bear in mind before embarking on this route.

Property decreasing in Value:

Equity will grow when your property increases in value. Equally, property prices can fall, which means your equity decreases.

Consider the Fees Involved in Remortgaging

Emerging from the transaction with extra money sounds incredibly tempting; however, it is worth considering the transaction fees that can eat into your lump sum. These fees include:

  • Broker’s fees, which can be between 1%-2% of the loan amount.
  • Valuation fees to assess the property, which vary, depending on the property price and the type of valuation
  • Conveyancing fees to cover the legal aspects of the transaction, which are usually between £850 and £2,000

The fees involved in remortgaging to release equity can reduce the amount you finally receive considerably. It is advisable to check with an independent mortgage advisor to discuss whether this is the best option for you and also to have a clearer idea of what deals are available.

Johnsons in Ealing, West London, puts the client’s needs first and provides robust solutions for even the most complex situations. They specialise in a range of financial services, including independent mortgage advice, tax and accountancy services.