Releasing equity from your house

 

 

People who own their own home or investment properties can release equity from that property for a range of reasons, if that reason is approved by a lender and the affordability works. 

 

Equity is the value within an asset that belongs to you, which in this case would be the portion of the property that is now owed on the mortgage. E.g. If your house is worth £200,000 and you have an outstanding mortgage of £150,000 you have £50,000 of equity within the home that belongs to you. 

 

If you have for example a property valued at £200,000 and an outstanding mortgage of £150,000 you have £50,000 of equity to tap into. If the property is your residential property (Your own home) they will allow you to borrow up to 90% of its value as a mortgage. So, you could take out a new mortgage or a further advance with your current lender up to £180,000. Once you have paid off your current mortgage you would release £30,000 of equity. 

 

If the property is a buy to let property (investment property) you can borrow up to 80% of its value, so you anything over and above the current mortgage balance would be equity you release. 

 

The amount you can raise is dependent on 2 factors, the property value and the affordability. The value of the property will provide you with the amount of equity available, but your ability to release that equity will depend on you being able to afford that level of mortgage based on your income or the rental income you receive for your property. 

 

For a residential mortgage, releasing equity is dependant on your income and outgoings. Lenders will typically lender you 4.5-5x your annual income based on their affordability calculations. Although you may have the equity in the property, you may not be able to pass the affordability calculations at that level of borrowing. 

 

For a buy to let property, the amount you can borrow is based on the lenders rental stress test. The amount of money you receive from the property and how you own the property, whether that be as an individual or a LTD company. 

 

Most lenders impose a 6-month rule for remortgaging, but what is the 6-month rule? Lenders require that you own the property for at least 6 months before remortgaging it. Whether you have bought it with cash, a bridging loan or a mortgage they require that you hold the property for 6 months before you remortgage due to anti money laundering measures. 

 

Buy to Let investors who use the Buy, refurb, rent and refinance model will buy a property with cash or a bridging loan. They will then complete a full refurbishment of the property to add value to the property and get it to a lettable standard. Once they have done this, they will look to remortgage the property for its open market value with a 75% mortgage and look to release as much equity as possible to fund their next property purchase to allow them to recycle their money to continue investing. In this situation there are a few lenders who will offer a 75% mortgage on a property within 6 months, but not many. Most will enforce the 6-month rule where they will not allow any remortgage applications until you have owned the property for at least 6 months. 

 

There are a range of reasons you can release equity for and a range of reasons you cannot release equity for. We list them below with a brief description of each to give you a good idea… 

 

You can release equity to fund improvements to the property such as an extension, loft conversion or replacing kitchens and bathrooms. Taking money out to improve or add value to the property is fine with lenders. 

 

Lenders will allow you to add unsecured debts such as credit cards and loans to your mortgage, this could stretch the term of the debts to reduce the payments along with securing a lower interest rate on the debts. For example, a credit card could carry an interest rate of 27%, whereas adding this to your mortgage may incur an interest rate of 4-5%. 

There is a caveat to this, you will be taking unsecured debts and securing these to your property which can increase the risk of repossession if you fail to maintain the repayments. 

If credit cards are on an introductory interest free period, we would advise against adding these to your mortgage as you would incur interest on a debt that was previously incurring no interest at all. 

 

As the additional lending you are taking out is to be taken from one property and used on another property, lenders are OK with this too. This could be to purchase another property for you to live in or for a buy to let property for example. 

 

Many lenders are also happy for you to release equity to cover private school fees for your children to support their education. 

 

Few lenders will allow additional borrowing for business purposes due to the risky nature of how you intend to use the funds. Of those lenders who will allow this they have specific criteria around how those funds must be used, for example they cannot be used to prop up a business that is losing money or to pay outstanding business debts or tax liabilities. The money can be used towards funding growth plans for your business such as buying new equipment or buying out a business partner to increase your stake in the business. 

 

 

Buying a share in the property 

If you have bought a property using a help to buy loan or a shared ownership you can release equity from your home to repay the HTB loan and buy larger shares within the property. 

 

As always we suggest speaking with an independent mortgage adviser to help you navigate your options to find a lender who’s criteria you meet, who can lend you the full amount you need based on your income and outgoings and also to complete the paperwork for you. 

 

For more information on bad credit mortgages or how we can help please get in touch below 

 

01482 205084 

Info@greenandgreen.net