Remortgaging is not only something to consider when your current mortgage term is coming to an end (to prevent reverting to Standard Variable Rate), it can also be a very useful way to raise capital.
Using equity tied up in your home can pay for improvements to your house – whether that is an extension, a loft conversion or for adding a home office. The coronavirus lockdown has meant millions of people experienced WFH (working from home), and many have discovered their homes fail to offer adequate space.
According to ONS figures, 20 million people relocated to their home to work during the pandemic. That is almost 10 times the number that normally do. A survey also reports that 45% of people believe they will work from home more often when the lockdown ends.
Building an extension for a purpose-built home office could be high on your list of priorities as a result. Maybe you feel an extra room for your little ones is going to be necessary after being in the same space with your family for 12 weeks or more.
So, releasing equity by remortgaging could give you the cash you need to fund those plans. And it is likely to be cheaper than searching for a new house!
What is equity?
When you take out a mortgage on your home, the company providing it owns a large percentage of your property. For example, first-time buyers who take out a mortgage with 90% loan-to-value (LTV) effectively own 10% ‘equity’ in the property.
Over time you increase the amount of the property you own as you pay your mortgage. In our example, the buyers’ LTV may be around 88% a year later, so their equity rises and becomes 12%.
This is not the only way to increase the value of your equity, it rises if the property’s value goes up. This means any equity you have can be released to pay for home improvements, but terms and conditions and lending limits apply.
How remortgaging for capital works
If your property was worth £250,000 and you took out a repayment mortgage of £200,000 five years ago, the amount you owe will have fallen. Let’s say for example it is now at £180,000. If the property’s value has also increased to £300,000, it means the equity you own has increased from £50,000 when purchased to £120,000 today.
If you were simply remortgaging at the end of your current deal, your mortgage would be for £180,000. The loan-to-value would now be 60%, a significant fall from the 80% LTV you originally borrowed.
But you could, assuming you have the income to support it, remortgage for a larger amount and release some equity to spend on your home office or house extension. In our example, we may remortgage for £200,000, releasing £20,000 to spend.
Beware early repayment charges
If you remortgage during the initial fixed or tracker period of your mortgage you are likely to incur an early repayment charge. This would then reduce the amount of equity you can release. If your initial mortgage period has ended and you have moved over to the lender’s standard variable rate, you are unlikely to face an early repayment charge.
The best thing to do before changing is to contact our mortgage experts. Our independent mortgage advisers have access to more mortgage deals than the high street or via comparison sites. We have helped many people in the North East and beyond release equity for home improvements and other reasons when it is right for them.
If you are interested in finding out more, you can contact our mortgage team by emailing firstname.lastname@example.org
Your home may be repossessed if you do not keep up the repayments on your mortgage