Your home is likely your biggest asset, and as you pay down your mortgage, you build up a valuable asset called equity. This is the difference between your property's value and the amount you still owe on your mortgage.
For example, if your home is valued at £300,000 and your outstanding mortgage is £200,000, you have £100,000 in equity. Releasing this equity through a remortgage is a popular way to unlock the value of your home without having to sell it.
So, how can you use this equity?
Common reasons for releasing equity
Most people release equity to fund a specific goal or project. Lenders will want to know your reason for releasing funds, as this can affect their lending decision. Common reasons include:
- Home improvements: Many homeowners use a remortgage to fund large-scale renovations like an extension, a new kitchen, or a loft conversion. This can be a smart move, as the improvements could increase your home's value, potentially offsetting the additional borrowing.
- Debt consolidation: If you have high-interest debts like credit cards or personal loans, you might be able to consolidate them into your new mortgage. A mortgage typically has a much lower interest rate than unsecured debt, which could help you manage your monthly payments more effectively.
- Buying another property: You can use the equity from your current home to provide a deposit for a second home, a holiday property, or even a buy-to-let investment. This can be a great way to expand your property portfolio without needing to save a new lump sum.
- A "living inheritance": Some people choose to release equity to gift a large sum of money to a family member, perhaps to help a child or grandchild get on the property ladder. This is sometimes called a "living inheritance" as you get to see them enjoy the benefits.
Why a lender may decline your application
While releasing equity can be a great option, lenders are cautious and may decline your application for a number of reasons. Being aware of these can help you avoid a rejected application and a wasted credit search. Lenders are most likely to decline a request to release equity if the funds are for:
- Paying off an outstanding tax bill: Lenders often view this as a sign of financial mismanagement and are highly unlikely to approve the request.
- High-risk investments: If you plan to use the funds for something speculative, such as investing in cryptocurrency or a business venture with a high chance of failure, a lender will likely decline the application.
- Gambling debts: Lenders are very hesitant to approve a remortgage to clear debts that are as a result of gambling.
Other reasons for your application getting declined can be related to the property itself. Lenders may decline if the property has a non-standard construction (e.g., a timber frame), has serious structural issues, or is located in an area with a high flood risk. As expert mortgage brokers, we can help you understand if your property meets a lender's criteria.
How much equity can you release from your home?
While you may have built up significant equity, lenders typically won't allow you to borrow against all of it. The amount you can release is generally determined by the loan-to-value (LTV) ratio. LTV is the percentage of your mortgage against the value of your home. A lower LTV means less risk for the lender, which could lead to better interest rates for you.
Let’s use the example from earlier: a home valued at £300,000 with a £200,000 outstanding mortgage. This puts you at a 66% LTV (£200,000 ÷ £300,000 x 100).
Now, if a lender offers a maximum LTV of 85%, the most you could borrow in total is £255,000 (85% of £300,000). Since you already have a £200,000 mortgage, this means you could potentially release up to £55,000 in equity.
Most lenders will allow you to borrow up to a certain LTV, such as 85% or 90%, but this can be influenced by your reason for releasing equity. For example, some lenders may limit the LTV to a lower percentage (e.g., 85%) if the funds are for debt consolidation, as this can be seen as a higher risk. In contrast, they might be more flexible if the funds are for home improvements, as this could increase the property's value.
Expert mortgage advice is key
Deciding to remortgage to release equity is a big decision with many factors to consider. The reason for your borrowing can directly impact the rates and terms you are offered, so it is vital to speak to a mortgage expert. We will assess your specific needs and find a lender and product that is right for you, ensuring you are fully prepared for the process.
Book your free initial consultation to discuss your options.