There are lots of situations where you need to borrow more money – that extension you want to add, those debts that the interest rate keeps climbing on, the new bathroom you really need. Whatever the reason, a remortgage to release equity can be the ideal solution and this guide will walk you through the various options and scenarios to help you know if this is the right option for you.
As mortgage brokers, we deal with a range of lenders who will help with all kinds of different situations, financial and work-related. So don’t be afraid to reach out, no matter what the situation!
How does remortgaging to release equity work?
For many lenders across the UK, there is no problem borrowing more money as long as you can pass their eligibility checks. Different lenders do have their own criteria to qualify for a mortgage, how much you can borrow depending on the equity in the property and rules around your credit history. When you work with a broker, you can get the best of these without making numerous applications.
Equity is the portion of the property that you own, that you have paid off the mortgage on and is a huge asset. To calculate the equity, take the balance of the mortgage and any secured debt from the value of the house. This is your equity. And you can borrow some of this to generate cash for different reasons.
When you look to borrow more money, it is often the case that we go to the bank and ask to remortgage what we have. And this can work but there are lots of different options to consider. Here are a few examples.
Full remortgaging for additional borrowing
This is where you take an entirely new mortgage and clear your existing one so that you can release some of the equity in the home
Second mortgage or secured loan
This is where you leave your existing mortgage as it is and take either a second mortgage or a secured loan against the property to release some equity.
How to remortgage to release equity
Many UK lenders offer the facility to remortgage in order to release some equity as long as you pass their eligibility checks. They will often consider up to 75-85% of the value of the property, occasionally as high as 90% depending on what you want the money for. There are also secured homeowner loans that let you borrow over 100% of the value of the property but the rates for these are usually much higher than a normal mortgage.
The first step is to consider your eligibility for the mortgage. They will look at factors such as:
- How much equity in the home?
- Your age (some have upper age limits)
- Income and employment status – lenders have to check you can afford the mortgage, but different lenders look at your situation differently
- Credit history – clean helps but there are lenders who will help with a wide variety of bad credit problems
- Is it a large loan? These are typically loans over £500-750,000 that have different lending rules
- Property factors such as age and construction type
Common questions around equity release
Let’s look at some of the most common questions we are asked around equity release remortgaging.
How much equity do I need?
The more the better as this shows you have been paying your mortgage and built up this equity. But lenders will consider different situations with anywhere from 75% to 90% LTV considered.
How much can I borrow?
There are two factors that decide how much you can borrow – how much equity you have and your affordability figures. Lenders might also consider the purpose of the loan when making a decision.
How income impacts additional borrowing
Affordability is something that is defined by different lenders and some are stricter than others. Some will take into account things like bonuses and overtime, some will allow part of it and others not at all. A general base rule is that they take your income and times it by four to see how much you can borrow. But other lenders will go as high as 5 times your income and a few as high as six times depending on your details.
This still factors into a remortgage. Most lenders will ignore debts being paid off when working out the mortgage and look at what you will have when these are cleared. Some lenders can still consider cases outside their normal affordability if the situation is right.
Sometimes, you can even borrow more on a second mortgage than on an original one. Some lenders allow up to 10 times annual income in some situations.
How the reason for borrowing impacts the lenders
The other big factor around remortgaging can be what the purpose of the borrowing is. In fact, the loan to value ratio you can get is often dependant on what you plant to do with the money. For example:
- Debt consolidation – 80-90% LTV
- Home improvements – 80-90% LTV
- Mortgage swap without additional money – 90-95% LTV
- Buy furniture, electrical or white goods – 80-90% LTV
- Buy a car caravan or boat – 80-90% LTV
- Buy the final share in a shared ownership – 90% LTV
- Buy a self-build home – 75-90% LTV
Some lenders won’t consider it if you are planning to invest, save or share purchase with the money or invest in your business. But others will consider and will go up to 90% LTV.
Remortgaging for business purposes
Remortgaging your house for business purposes is something that only specialist lenders will consider. This will make it a commercial product, and these have different rules and affordability criteria involved.
For example, if you decide to remortgage to get capital for a business or to fund a start-up then most lenders won’t consider the remortgage unless for high net worth customers with over £150,000 after-tax income.
The reason for this is that when you are starting a business, there’s no way to prove the income and cash flow you will have. Or there’s the risk that the business could go under and they might not get the money they are owed.
Remortgaging buy to let for business
If a lender is willing to accept a residential buy to let, then they are often willing to consider one for business purposes. And likewise, if they don’t accept residential, the won’t accept commercial.
Investing or growing a business
For an existing business, some lenders will consider things a little more. If you want to remortgage to invest in a business you already own, lenders may decline due to an unknown potential for risk. This means if your business fails, they don’t know if you can continue to pay the mortgage. They may consider if they know things such as:
- Will your current income stop if you invested the money into the business?
- What does the business do and for how long?
- What income do you receive?
To remortgage to buy shares in another company, then there are specialist lenders who will consider it depending on the situation
Alternatives to remortgaging for business
If you need to raise money for business purposes, there are other options to consider apart from remortgaging your home that could work better.
Secured loans for business purposes, known as second charge mortgages, are more flexible than the main residential mortgages. They are happy to consider situations where you raise money for a business purposes and rates tend to be higher.
Another option is a business loan, not secured against your property. Cost of borrowing will likely be higher, but these are worked out more on the business figures rather than your personal information. Lenders will also want guarantees from shareholders and directors about what happens if the business fails.
Commercial bridging finance
For short term financing, commercial bridging loans can be taken. These typically go over 6-12 months and are paid off in full or by another financial option. They are often used when less conventional options are available.
Asset finance is used to secure loans against assets rather than property. This could be business equipment, machinery, vehicles, land or other assets. It is always best to work with experts in this kind of finance if you are considering it.
Can you pay off debts with a remortgage?
One of the most popular reasons to take a remortgage is to clear off other debts and consolidate them into one place. This often helps to lower monthly outgoings, reduce interest paid and make certain debt is paid over a set period of time.
If you have equity in your home, then this can be a good option to consolidate those debts. You can work with a mortgage adviser to consider the benefits of a remortgage and what debts you want to clear to make sure it is the best option.
Paying a tax bill
Some lenders won’t allow a remortgage to pay a tax bill but there is a small number who will. Often as long as the business is trading well and the issues that led to the bill have been solved, these specialists will consider it.
Paying off school fees
If you need to pay school fees for various levels of education, some lenders may consider this. but there are also other options that might be better such as the Fees in Advance scheme.
How to release the equity
The actual process of remortgaging for most people is a straightforward one. If your circumstances are the same as when you took the original mortgage, then it is likely to be a quick and easy process. It should work like this:
- Work out your LTV ratio by dividing the loan value by the value of the home and multiplying it by 100. Make sure this will be affordable against your income and outgoings. Remember most lenders stop at 4-5 times your income, a few going as high as 6 times. Any more and you might need a secured loan.
- Work with a broker to find the best deals for your situation. Mortgage comparison charts are great, but they don’t consider induvial details, so it is best to work with someone. Once you find the right deal, you can move on.
- You will provide all relevant documents including proof of ID and address and the broker will get an agreement in principle approved
- The full application then goes to the lender and they will look to have a valuation on the property. Once this is signed off, it becomes a formal offer
- Solicitors carry out the paperwork and organise the release of funds
- The paperwork is finished, and the funds are deposited in your bank account.
How soon can I release equity?
Some lenders will allow you to release equity as soon as you have some although legally, the borrower needs to have owned the property for six months before remortgaging. Exceptions might be for situations such as inheriting property or buying out a family member.
Shared equity properties
Shared equity properties are different to shared or joint ownership. This is where the property is owned by mortgage and secured loan, often from the government or private developer loans. The most common example is the Help to Buy scheme where buyers put down 5% an then get another 20% from the government schedule with the mortgage for the other 75%.
These situations can be more complex than a normal remortgage but there’s nothing to say you can’t get one. There are lenders that specialise in Help to Buy remortgages so ask your broker about these.
Buying someone out
If you are buying someone’s share in the property, then the process is the same as a normal mortgage. The lender will look at income, credit history and risk involved in the revised agreement. So if you are separating from your partner, they will look at your new situation as a single person. They will want to be sure you can pay the new mortgage on one income alone.
A transfer of equity mortgage can be done with an existing lender or a new one. It is important that you keep up payments on the existing mortgage until the situation is sorted out as this can lead to problems. And other parties will need to sign to confirm acceptance.
Stamp duty and equity remortgages
Stamp duty land tax (SDLT) has to be paid if the share of the property the new person takes on is worth more than £40,000 in order to complete the transaction. However, stamp duty only applies on a transfer of equity agreement is the share of the property is worth more than £125,000.
Capital gains tax on remortgaging
Capital gains tax is paid when you offload an asset based on the profit made. In most cases, residential properties don’t fall under this unless you are a landlord selling a house you have been renting out.
Can you remortgage with negative equity?
If you have no or negative equity, it can be possible to remortgage but likely only with your existing provider and to change schemes for a better interest rate. You can’t normally borrow more without having some equity to borrow from. The exception to this is non-equity borrowing where some lenders will go up to 120% of the property value but interest rates will be higher than traditional mortgages or secured loans.
Remortgage surplus funds
The term remortgage surplus funds applied to capital due to you after the completion of a remortgage agreement. In this situation, you have borrowed more money than was needed to settle a debt with a previous mortgage company and this money is paid to you. So if you have a remortgage for £100,000 and it takes two months to sort, you will have made two more payments on your existing mortgage. This means you will have a surplus left due to this and this will be owed to you.
Can you remortgage to release equity on a buy to let?
Most lenders will offer remortgages on buy to let properties depending on the circumstances. For example, how many properties are held, if the company is a limited company or personal name and the rental income situation using the new stress testing guidelines.
Buy to let second charges
A buy to let remortgage to release equity might not be the best option as there are other ways to create those funds. Leaving the mortgage as it is and getting a secured loan may be one good option for this situation. Secured loan lenders tend to be more flexible about things like income, credit history and purpose of the money but interest rates will be higher.
What are the alternatives to a remortgage?
If you have been reclined a remortgage on a residential or buy to let property, there are still alternatives that might work for you.
Second charge mortgages
As mentioned, second charge mortgages are a loan secured against the property – another mortgage on top of your existing one. If you have been unable to remortgage your existing product, then this might be a good option. Lenders are often more flexible and can lend up to 10 times income depending on details.
Personal loans that are unsecured and not associated with the property are another option for borrowing. This means your home isn’t at risk if you don’t meet the payments, but they tend to have higher interest rates. They are also capped at £25,000 and must be repaid within 7 years.
Bridging loans are stop-gap loans that help you with short term funding until a traditional mortgage or loan is available. Say your credit score is poor but you are taking steps and it will improve in the next few months – then a bridging loan could help in the meantime.
Interest rates are higher on these products. They are popular for landlords and property developers to get access to funds quickly with the knowledge that selling the house will then mean they can pay off the debt. There are also legal and administrative fees to take into account with the borrowing, so it needs to be considered carefully.
Confusingly, equity release mortgages are different to remortgaging to release equity! An equity release plan is aimed at the over 55’s and one of the most common types is called a lifetime mortgage. With these products, it is a loan secured against the property that doesn’t have monthly payments. Instead, interest is added to the loan amount and the whole amount is due to be paid at the end of the loan term. This is usually either when the homeowner passes away or enters long term care. With these loans, the money can be used for any purpose.
If you are over 55, then equity release might be worth considering but shouldn’t be done lightly. It is important to understand the impact it will have on what you leave for your children.
Additional borrowing for large loans
If you need to borrow more than £500,000 then there are specialist lenders who handle these loans but do have special terms associated with them. There are fewer lenders for these sums and the maximum LTV is often lower. If you have bad credit or are self-employed, this may mean only a small number of lenders are available. But there are still options your mortgage broker can look at for you.