Remortgage to release equity: how it works

Remortgaging to release equity means replacing the current mortgage with a larger one, on the same home, and receiving the difference as cash. Equity is the part of the property value that is not covered by the mortgage, so it grows as the balance is repaid and as the value rises. The new loan is repaid over the agreed term.

People release equity for home improvements, a deposit on another property, helping family, paying off other debts or large one-off costs. The new mortgage replaces the old one in full, so it can also bring a new rate and term, and early repayment charges may apply if the current deal has not ended.

How much can be released depends on the property value, the current balance, the lender's maximum loan-to-value and whether the income supports the larger loan. The lender values the home, applies its loan-to-value limit, then checks affordability on income and outgoings, and the lower of the two results sets the largest new mortgage.

The amount released is the new mortgage minus the current balance and any costs added to the loan. Lenders may ask what the money is for, and some limit borrowing for certain uses, such as business purposes or gifts. A higher loan-to-value usually means a higher rate, so releasing more can raise the cost of the whole mortgage, not only the extra part.

Lenders check the property value, the borrower's income and regular outgoings, credit history, the remaining term and the reason for borrowing. A remortgage that increases the loan is assessed in much the same way as a new mortgage application, with payslips, bank statements and, for the self-employed, accounts or tax calculations to support the income.

Lenders also check the property itself, including its condition, construction and tenure. A short lease, non-standard construction or recent works without sign-off can limit the amount available. The age of the borrowers at the end of the term affects how lenders assess income in retirement.

The main costs are the interest on the larger loan over its term, any early repayment charge on the current deal, and the new lender's arrangement, valuation and legal fees. Some lenders offer free valuation and legal work on remortgages, usually with a different rate. Adding fees to the loan means interest is charged on them too.

Spreading the extra borrowing over a long term keeps payments lower but raises the total interest paid. Comparing the total cost over the deal period, and over the full term, shows the real price of the money released. The guide to remortgage costs and fees explains each charge.

A full remortgage is not the only route. A further advance is extra borrowing from the current lender, often on a separate product, which can avoid an early repayment charge on the existing deal. A second charge mortgage is a separate loan from another lender secured behind the first mortgage, leaving the first mortgage untouched.

For older homeowners, equity release products such as lifetime mortgages let people borrow against the home without monthly repayments, with the loan and interest repaid when the home is sold. These are different products with their own rules and costs, and they are regulated separately from standard remortgages.

Which route fits depends on the current deal, the amount needed, the borrower's age and income and the cost of each option over time. Comparing the total cost of each, rather than the rate alone, gives a fair picture.

Borrowing more against a home increases the debt secured on it, so the home is at risk if payments are not kept up. A higher balance also leaves less equity if property prices fall, which can limit choices when the deal ends. Using secured borrowing for short-term spending can mean paying for it over many years.

Before applying, it helps to work out the monthly payment on the new loan at the new rate, and to check how it would look if rates were higher when the deal ends. Those buying another property with the money are covered in the guide to remortgaging to buy another property.