If the value of your home has risen since you bought it with your first mortgage or if you have paid down a significant portion of your first mortgage, you have equity in your home which you can access through remortgaging. There are many reasons why some cash may be welcomed in your life such as for buying a new car, taking a holiday, paying educational expenses or reducing debt. In some cases, the lender may need to approve the planned spending of the money gained by the release of equity.
What is Remortgaging?
Remortgaging means you find a new lender for a mortgage on your home who pays off your original mortgage. You may be able to get better terms for the new mortgage and reduce your interest payments as well as the total cost of the loan.
The competition among mortgage lenders is strong, and because of this, it is not difficult to find a lender who will remortgage your home. There is also a good chance you will get a lower interest rate. It is worth asking your current lender if they are willing to give you a better deal, so you can avoid looking for a new lender and the costs of remortgaging.
Is Remortgaging for Equity Release really the best Option?
Remortgaging to gain equity means increasing the size of the loan. If you want to gain cash to pay down debt, you must be sure that the new mortgage does not cost you more in interest than the debt you are repaying. In this case, it would be better to repay the debt at the original interest rate.
On the other hand, mortgages usually have lower rates of interest than other forms of borrowing, which may make debt consolidation worthwhile.
If you want to renovate your house to increase its value, you should find out from several estate agents if the renovations will increase the value and by what amount. If you are borrowing 10,000 pounds to make a renovation that will only add 3,000 pounds of value to the property, this may not be a good decision. However, if a 10,000 pound loan will raise the property value 15 to 20,000 pounds, it is a good choice.
If you plan to take a once-in-a-lifetime holiday or buy a new car, remember that you will be still paying for the loan years after the holiday is over and the car is sold. Releasing equity means the term of the mortgage will be longer, interest rate payments will increase because of the increased borrowing, and the total amount of the loan may cost more in the long term.
Raising money through equity release is very beneficial for making investments. This is true for improving your home if the value rises more than the interest on the loan, but it is also a good way to invest in something that gives interest or a dividend. This way, you could be making money on your extra cash.
The Cost of Equity Release
If you are remortgaging for equity release, you need to find out from your current lender if there are any early repayment charges on the current mortgage. There may also be an exit fee.
New lenders will also have fees including a booking fee upfront to reserve the remortgage deal. There is also a product fee on some remortgages as well as non-product fee options. However, the non-product fee option may have a higher interest rate.
Your property will need to be valued and surveyed. Sometimes a lender will do this for free, if you use them for the remortgage. There will also be a conveyance fee for transferring the loan. Some lenders waive fees to attract borrowers. You should look into this carefully, because it may mean a higher interest rate. It would be cheaper in the long run to pay these fees and get a lower interest rate.
If these fees and costs seem daunting, it is worth consulting a mortgage broker or financial adviser to add up the costs and check them against the new interest rate to be sure remortgaging to raise money by releasing equity is the right step. It may be better to wait.
How to Release Equity?
Releasing equity is not as simple as a bank withdrawal or a personal loan. It needs to be planned carefully in advance. The amount of capital needed and for what purpose it will be used should be decided. For some things, it may be a fixed amount, but for home renovation there could be overruns in the construction costs that need to be considered.
When the amount and purpose is decided, it would be good to ask an expert financial adviser to determine if releasing equity is the best way to raise the required funds. All the costs of a remortgage need to be factored into the overall cost as well as any savings with a lower interest rate.
Talk to a Professional
If releasing equity is the best option for raising the money you can either ask your current lender about equity release or you can remortgage. Mortgage advisers, lenders, brokers and Independent Financial Advisers will help you choose the best option for releasing equity in your home. Make sure they are regulated by the Financial Services Authority, so they are obligated to be fair and meet certain standards. Ask them at the beginning about their level of independence and exactly what services they offer. Also ask about their fees for these services.
There are online comparison tools that make comparing quotes from different lenders easy. It is important to compare every feature of the loan and not just the interest rate. The overall cost, type, standard variable rates, maximum loan-to-value as well as interest rates should be compared before selecting a lender. You can enter some details about your personal situation and preferences, and you will get a list of remortgaging deals that are available. If you are ready to select a lender, there will be an application process on their website.