Equity is the portion of your home that you own i.e. the difference between how much you have left on your loan and the current market value. If you’ve owned your house for a while you have probably seen a rise in the value and paid off some of the mortgage too meaning you have a potentially substantial amount of equity available.
There are many reasons why you might want to remortgage to release equity. You may want to do this in order to fund home improvements and ultimately add value to the property. If you have carried out significant home developments or renovations and want to release the equity gained from the increase in value, you can apply for a remortgage to do this but expect the lender to scrutinise any application, requesting documentation and they may also want to carry out their own valuation before making a decision.
This could be a cheaper way to pay for your home improvements or renovations when interest rates are low compared to a personal loan where interest rates are usually much higher however whether this makes financial sense for you will depend on how much you have paid off on the mortgage and the current value of the property. It is also important to remember that personal loans are often for shorter terms meaning that the debt is paid off more quickly than the mortgage and you could end up paying more in the long term if you remortgage.
You may wish to release equity in the property to clear and consolidate other existing debts. Whilst this can reduce your monthly payments, it is worth noting that you will be paying it off over a longer term as personal loans tend to be shorter in term than mortgages.
Some people want to free up cash to help their children buy their first home or to fund them through university. Equally some people want to use the money to start a new business.
Whatever your reason, it’s worth noting that it is possible that when you remortgage to release equity, your interest rate increases due to you having a higher loan-to-value (LTV). Loan-to-Value (LTV) is essentially the size of your mortgage or loan in relation to the value of the property. It is shown as a percentage. For example, if you have a mortgage offer with an LTV of 80%, your mortgage will be up to 80% of the property value.
You will also need to consider the affordability of taking on a larger loan. This is likely to result in higher monthly repayments or a longer mortgage term and if you fail to keep up with these repayments, you could end up having your house repossessed. If house prices fall, you could find yourself in negative equity if you have taken on a larger loan and no longer have much equity in the property.
