If you are looking to make some major home improvements, you may be able to finance this by accessing the equity in your property.
Most homeowners require a mortgage to buy a house. This means, until it’s paid off, that you don’t completely own the entire value of your home. The value of the portion that you do own is known as equity – and if you have enough of it, you could potentially use it as a financial asset.
Even with a mortgage, your home will probably be the biggest financial asset you have. However, the value is essentially tied into the bricks and mortar rather so it doesn’t automatically offer you a tangible, easy-to-access cash sum.
There is a way to release some of that equity and get the physical cash into your bank account. And no, it doesn’t involve selling your property.
If you have enough equity in your property, you could access it by simply remortgaging.
How does remortgaging to release equity work?
If you’ve remortgaged your property before, you’ll know that when you take out a new loan you simply take it for the current amount of debt left on your mortgage.
If you are remortgaging to release equity, you’ll need to remortgage for a higher amount than your current mortgage balance.
Switching to a new deal, for a higher amount, will then free up a lump sum of cash. Many people use their equity to make home improvements, such as adding a conservatory or garage, or building an extension. It could also be used to invest in a second property or to start up a business. You can use it however you wish.
Let’s take a look at an example of how it all works:
You bought your property for £150,000. You had a £20,000 deposit and took a mortgage out for £130,000. That £20,000 is the initial equity you have in the property.
As you make your monthly payments, you are increasing your equity bit by bit.
But it’s been a few years now since you bought your house. Prices have increased and it’s gone up in value to £200,000. Your outstanding mortgage balance is now £110,000. This means the equity you have in the property is worth £90,000.
If you were remortgaging to try and find a cheaper deal, you’d simply look to borrow £110,000.
But seeing as your equity has grown substantially, you could release some of that cash to make your home improvements.
So instead of remortgaging for £110,000, you could remortgage for £130,000 which would free up £20,000 to be used as you wish. You’re still left with £70,000 equity in your home, which is still a significant increase on what you started off with.
Is remortgaging to release equity the right option for me?
If you have a significant amount of equity built up in your home, it can be really tempting to release it as cash, but it’s important to think carefully before making that decision.
Remember that if you remortgage to a higher amount, your monthly payments could go up. You’ll need to be sure that this process is going to be affordable for you in the long term.
Depending on the amount you are wishing to borrow, it may be worth looking into a personal loan. Whilst mortgage rates are low, the amount of time it takes to pay off could mean that it’s a more expensive way of borrowing, so make sure you weigh up all the overall cost of borrowing.
If you have any questions about remortgaging to release equity, it may be a good idea to speak to a mortgage broker. They will be able to search a range of lenders to help find the right remortgage deal for you and can advise whether or not a remortgage is right for your circumstances.
The above post does not constitute advice – financial, legal or otherwise. The information within this article is the author’s own opinion and do not necessarily reflect the views of SO Media or So Smart Money.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.