Almas Uddin
Founder and Mortgage Advisor
19 Aug 2022
Knowing that you have equity in your home and understanding how to make the most of it aren't mutually exclusive!
You can use equity to pay off debts, extend your borrowing, or access funding for renovation projects, or a big purchase, depending on the value of your property and your mortgage balance.
Revolution Brokers explains the basics of calculating your equity ownership and navigating the remortgage market in this guide.
Understanding Equity in Your Home
Equity is the difference between what you own and what you owe. If your property is worth £200,000 and you have a mortgage of £150,000, that means you have £50,000 in equity.
Your equity proportion will increase for two primary reasons:
- Houses tend to appreciate, so over time, the vast majority of homes (including apartments and other property types) will be worth more and more due to rising housing costs and other factors like inflation.
- As you make repayments each month, you gradually reduce the capital balance owing - assuming you don't have an interest-only mortgage. That means your mortgage debt reduces, and your equity climbs.
If you're unsure how much equity you have, you can make a rough guess by estimating the current market value of your property and then subtracting your mortgage balance.
This method is only an indication, so you'll need to organise a valuation survey if you want to get exact figures to play with.
Borrowing Against Your Property Equity
Remortgages are perhaps the most common way to borrow against your equity, but there are multiple potential products, including secured loans and second charge mortgages.
In essence, you can borrow funds for home improvements, consolidate debts or access a cash lump sum, with the loan secured against the equity you own.
Mortgage rates are currently very low, so remortgaging is typically the most affordable way to access a fairly large loan at the lowest cost.
However, the more you borrow and the longer your mortgage term, the more you may pay altogether.
Ways to Access Equity
To access your equity, you have three main options:
- Selling the property - retaining the balance left after paying off your remaining mortgage.
- Remortgaging - repaying your current mortgage and keeping any difference as a cash lump sum.
- Taking out separate financing - starting a new loan or mortgage in addition to your existing mortgage (although affordability assessments can be more rigid to ensure you can afford both loans).
If you aren't interested in moving home, the latter two options will be the most relevant. Please note that selling a property includes buying and selling costs, legal fees and removal charges.
Using Equity in Your Home as a Deposit
The lender will require a new valuation and information about your current mortgage debt when you remortgage.
Provided the property is worth more than you owe, you can leverage your equity as a deposit to secure a more competitive mortgage rate or even purchase a second property or a rental investment.
If your equity is substantial, it may even be sufficient to purchase another asset outright.
Likewise, if you choose to downsize and purchase a lower-cost home, you can turn the equity into cash to use as you wish.
Remortgaging to Release Equity
Remortgaging, rather than moving or downsizing, means you borrow against the value locked into your equity. You can either switch to a different lender or apply for a new mortgage deal with your existing provider.
The new mortgage will need to be higher than the current debt to repay the old loan in full, with a balance left over.
Where your home has grown in value, and you have increased your equity ownership through mortgage repayments, you'll also often be borrowing at a lower Loan to Value (LTV) ratio.
LTV is the proportion of the mortgage applied for against the home's value - the lower the LTV, the less lender risk, and the better the interest rates you'll be eligible for.
It is important to seek independent advice if you are within a fixed-period term.
Remortgaging before you reach the term-end could mean incurring early repayment charges, which might make the process far more expensive.
Maximum Equity Release Through a Remortgage
Of course, you won't be likely to release 100% of your equity - because a lender always requires a deposit against a new mortgage and won't lend you 100% of your property's value.
Usually, you'll find that remortgages are available up to 95% of the property value as an absolute maximum, but normally closer to 80% or 85% if you meet all the eligibility and affordability criteria.
If you're interested in a remortgage and would like further advice about how much you could borrow and what you can use the equity for, please contact Revolution Brokers on 0330 304 3040 or email us at [email protected].
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