Owning a property is owning an asset. Your level of equity in the property is determined by the value of the property, minus any mortgage or alternative finance you have secured against it. When you purchase a property, your deposit becomes equity on completion of the purchase. If the property price rises, your equity increases and if the property price falls, your equity decreases. Releasing equity involves increasing the mortgage, with the equivalent amount then being paid to you.
Releasing equity is not to be confused with equity release. The latter is a very specific type of mortgage, not related to the content of this blog. There are two ways in which equity is released through mortgages. The first method is by capital raising as part of a standard remortgage. When you apply for the new mortgage, you apply for more than is outstanding on your current mortgage. The surplus funds are then paid directly to you on completion of the remortgage and you have a new larger mortgage. The second method is through a further advance. Applying to your current mortgage provider for additional funds. If accepted, the funds are released to you and the mortgage is increased by the equivalent amount. Capital raising is generally the easiest and most convenient of the two but if you’re tied into a fixed rate, a further advance may be your best option to avoid paying early repayment charges.
There are many reasons people wish to release equity from their homes. Whether it’s for an extension, a holiday, a house deposit for a child, repaying loans and credit card debts, the list goes on…
One of the most popular reasons for releasing equity is to purchase more property. As mentioned, properties are assets and property assets can be leveraged through mortgages. A common example of this is a let to buy transaction. This is where people choose to turn their current home into a buy to let as part of moving home. Equity is released from the current home and then put towards the deposit for the new. On completion, individuals are left with a buy to let property and their new home. However, this option is only available if people have over 20-25% equity in their current home as when turned into a buy to let, it will generally require a minimum 20% deposit down, often 25%!
Releasing equity from a residential property is also dependent on residential mortgage affordability. If you’re current home has no mortgage and you’re looking to arrange a mortgage to release equity, it must be deemed affordable. Residential affordability calculations are based on your income and your expenditure. Future income from anticipated rent is scarcely acceptable.
Minimum deposit restrictions on buy to let properties apply, especially when owning multiple properties, whether you’re buying the property or remortgaging an existing property. An individual owning a buy to let property without a mortgage, referred to as unencumbered, could own four equivalent properties if they bought each with a 25% deposit. Leveraging an unencumbered property portfolio could allow it to quadruple in size. Now this method isn’t for everyone. Some people would rather have a smaller, more manageable portfolio. However, if you’re looking at it from a business perspective, this is the way to go.
If you want to discuss releasing equity, be it out of your residential property or other properties that you own, let’s chat! We’re here to help with free, professional advice about what you’re eligible for, how it could be done and whether it’s right for you.