Equity and Remortgaging
Your equity is basically the value of the share of your property that you actually own.
We’ll explain exactly what equity is and how borrowing against it might benefit you over the course of this guide.
In this guide:
What is equity?
Equity is a fairly straightforward concept – it is the share of the value of your property that you actually own, as opposed to that which you borrow as part of a mortgage.
So if your home is worth £500,000, and you have a mortgage worth £400,000, then your equity is £100,000.
Your equity will increase then either as you make payments back on your mortgage or if your property increases in overall value.
There are various ways in which you can use your equity to improve your financial situation which we’ll go through in the following sections.
Accessing Equity - Selling Up
Of course, one very straightforward way of accessing your equity is to sell your property.
It’s particularly common for people to sell their house and then to use the equity to pay for the deposit on a new house, or even to pay for a new house entirely if your equity value is large enough.
If, when you sell your house, you choose to move somewhere cheaper, then you will have freed up your equity into cold, hard cash.
Accessing Equity - Remortgaging
Another way to access your equity if you don’t want to sell your house is to remortgage by borrowing against it.
If the value of your house has increased and therefore your equity has too, then you can take out a new, larger mortgage that reflects this increase in value.
Say your house has gone up in value from £350,000 to £400,000; you could cash in on this by remortgaging for a higher amount. You might currently owe £250,000 to your mortgage lender, but you could capitalise on your increase in equity by taking out a new mortgage worth, say, £280,000, giving you an extra £30,000 in cash.
There will be various fees you have to pay in order to do so but you should still end up better off than before. Your loan to value (LTV) ratio will have gone down given the increase in the value of your home, but the amount you’re borrowing will go up.
Considerations to Make Before Your Remortgage for Cash
While remortgaging your property to capitalise on an increase in equity can often seem like quite a straightforwardly desirable thing to do, there are a few things that it’s important to bear in mind before doing so.
Firstly, you should be clear on exactly how much equity you’ve got, and by how much your property has increased in value. You’ll be able to get a valuation from your mortgage lender but it will come at a cost, and so if you can get a free valuation from elsewhere it’s worth doing so.
You should also make sure that you’re still going to be able to afford your repayments, given that the size of your mortgage will increase. This includes taking into account any fees you incur as a result of the new mortgage being taken out, like early exit fees and arrangement costs.
To make sure that you get the best deals on your new mortgage, you should compare mortgages online. Using Money Expert’s mortgage comparison service will allow you to find the best mortgage rates on the best plans so that you can fully capitalise on your increase in equity without borrowing outside of your means.