For most people, their home is their biggest asset, and their mortgage is their biggest liability. While a mortgage is simply a loan that is repaid over a specified term, it can also be a tool that can be manipulated to suit your current and future financial needs needs – one example being through capital raising.
When people talk about equity, this simply refers to the value of your property minus any mortgage secured against it. You can never be 100% certain of the exact level of equity in your property as your property as it’s true value is only ever how much someone is willing to pay for it at the time. This can go up and down as it is affected by local market and wider economic conditions.
Capital raising is the process of releasing some of the equity in your property that you have accumulated through making your mortgage repayments. This increases your mortgage on the property by an equivalent amount and the equity released is simply sent to your bank account as cash from the mortgage lender. As your mortgage is a loan you’re repaying, increasing it may seem counterintuitive. However, there are certain circumstances where it may be appropriate and may make financial sense to do so.
The following are common examples but there can be many other reasons why it is appropriate to capital raise. Lenders will want to know why, and some may only allow it for certain reasons.
- Debt Consolidation – Raising capital to clear credit cards, personal loans or finance deals. This provides an opportunity to ease monthly cashflow by reducing potentially crippling debt. This may mean you pay more in the long run, but it offers an escape for people who may have got themselves into a bit of difficulty – it is so important for your credit status that you do not start missing payments on these kinds of liabilities.
- Home Improvements – Raising capital to do that dream extension that you’ve been planning for forever? Whether it’s landscaping your garden, building a garage, renovating your home or whatever it may be, if you’re struggling to save because your outgoings are high, but you’ve got sufficient equity in your home, this may be your solution.
- Purchase another Property – Raising capital to purchase a holiday home or rental property. The latter especially can translate to another source of income for you. People earn more by leveraging their assets – don’t be afraid to do so. It’s not for everyone but let’s have a chat and see if it’s right for you.
- Day 1 Remortgage – Raising capital against a property as soon as you have bought it. There’s a myth that you must wait 6 months after buying a property in cash before you can put a mortgage on it. There are now some lenders who will let you do it straight away; if you needed to buy in cash and now want to release the equity, a day 1 re-mortgage is available. Criteria can be tricky so get in touch for more information.
- Unencumbered (Mortgage Free) – Raising capital against a property that’s mortgage free. If you’ve cleared your mortgage but need/want to release equity for any of the reasons mentioned above, that’s fine too!
- Equity Release Mortgages – These are specific types of mortgages available to those aged 55 or over. The principle of releasing equity is the same as with capital raising. However, equity release mortgages work in a very different way. For more advice on these mortgages, please get in contact with us.
Usually, if you’re on a fixed rate mortgage, you will be tied into your current deal and/or mortgage lender. This means you would have to pay an early repayment charge (ERC) to leave the mortgage which is normally a certain percentage of the outstanding balance.
A further advance allows you to avoid an ERC by capital raising but staying with your current mortgage lender. While this is the preferred option, it is not always possible as some lenders do not allow further advances or will only let you capital raise up to a relatively low loan-to-value. If your lender is one of these, you will need to decide whether the process is worthwhile or whether you can wait until the end of your fixed period. This obviously depends on how important it is for you to capital raise and release some equity.
We often say in these blogs, if your personal circumstances change, allow your mortgage to change too. Capital raising is a prime example of how this can be done. If you want to know more about it and whether it’s something that could be right for you, get in touch!