Remortgaging to release equity can be a powerful financial tool for property investors, buy-to-let landlords and others. Accessing the capital tied up in your property without the need to sell can be a vital option in terms of managing finances, but it is important to consider the matter carefully if you believe that equity release is right for you. There are common misunderstandings that can affect how you view your equity release options and potentially have financial implications that you may be unaware of.
At JMW, our conveyancing solicitors provide the expert legal guidance needed to navigate the remortgaging process. Here, we debunk some of the most common myths about remortgaging to release equity, clarify how the process works and outline the ways that a solicitor can help you to avoid the pitfalls inherent to the process.

Common Myths About Equity Release

The equity in a property is the portion that you own outright. You can calculate it by taking the current market value of your home and subtracting your outstanding mortgage balance. Remortgaging to release equity is the process of taking out a new mortgage on your property for a larger amount than your existing one. The new mortgage pays off your old one, and the difference is paid to you as a tax-free cash lump sum. Homeowners and buy-to-let landlords can use these funds for major expenses like property improvements, consolidating debt or further investments.

Some common myths about equity release can make the process seem more complicated than it really is or can make property owners feel concerned about what it will mean for their finances. Some of the most common misunderstandings about remortgaging include:

1. You lose ownership of your home

One of the most persistent myths is that releasing equity means you give up ownership of your home. This is incorrect. When you are remortgaging to release equity, you retain full ownership. The new, larger loan is simply secured against your property, just like your original mortgage.

2. Your current lender will offer the best deal

Many people assume their existing lender will reward their loyalty with the best mortgage deal. This is rarely the case. Lenders often reserve their most competitive interest rates for new customers. It is crucial to shop around and compare offers from various providers. A mortgage broker can provide invaluable assistance here, helping you find a new mortgage deal that suits your personal circumstances.

3. Equity will cancel out early repayment charges

A significant oversight when remortgaging is failing to account for early repayment charges. If your current mortgage deal has not yet finished, your lender will charge a penalty for withdrawing from it early. These charges can be substantial, as they are usually a percentage of your outstanding mortgage balance and can amount to several thousand pounds. This could negate the benefits of switching, and you should always check the terms of your existing mortgage or wait until your current deal ends to avoid these fees. A solicitor can also advise you on whether the savings of a new deal would cover any early repayment fees.

4. You must be mortgage-free to release equity

It is a common misconception that you need to have paid off your mortgage entirely to release equity. In reality, most people who are remortgaging to release equity still have an outstanding mortgage balance. The new, larger mortgage pays off the old one, with the remaining funds released to you. If you wish to release money from a house that you own outright, this is called an unencumbered mortgage rather than a remortgage, but it works in the same way.

5. Your monthly payments will not increase

When you release equity, you are increasing the size of your mortgage debt. Even if you secure a lower interest rate than your previous deal, borrowing a larger sum of money will almost always result in higher monthly mortgage repayments. A mortgage provider will carry out strict affordability checks to ensure you can comfortably manage these increased payments.

6. It will always be good for your finances

Releasing equity can be a way to save money, but it is not right for everyone, and you should seek professional advice before committing to this approach. Additional borrowing is always a risk. Increasing your mortgage debt reduces the net value of your property, which means there will be less equity in the home for the future. While it is unlikely, a significant drop in house prices could put you at risk of negative equity, where the mortgage debt is greater than the home's value.

The amount of money you borrow can also affect your financial position either positively or negatively, depending on your circumstances. It can be tempting to borrow the maximum amount of equity available, but this is rarely a wise move. You pay interest on the total amount you borrow. Taking more than you need means you will have higher monthly repayments and pay significantly more interest over the mortgage term.

You should try to only borrow what you require for your specific purpose and pursue a range of remortgaging options from different lenders to get the best possible deal.

7. The process is the same as your first mortgage

Even if you have a perfect repayment history, the affordability checks for a new, larger mortgage are likely to be more rigorous than when you first bought your home. A strong credit history is vital. Lenders will review your credit report to gauge your reliability as a borrower, and a good credit rating will open the door to more competitive interest rates and a wider choice of lenders. They will scrutinise your income, outgoings and credit history in great detail to confirm that you can afford to release more money and cover the higher repayments.
With this said, the legal process when taking out a bigger mortgage on a home or buy-to-let property is similar to the initial purchase. Most mortgage providers ask for checks and searches to be carried out as they were when you first bought the property, and you will need a conveyancing solicitor to help you fulfil the legal aspects of the process in most cases.

Is Remortgaging to Release Equity a Good Idea?

Whether remortgaging to release equity is a good idea depends entirely on your financial circumstances and goals - how much equity you wish to release, your mortgage rates with your current provider and your overall house value. It is essential to weigh the advantages against the risks, and a solicitor can help you to consider whether the approach is right for your needs.

Some of the positive outcomes from remortgaging your property are that you can:

• Unlock a significant sum of money from your home equity without having to sell your house or move.
• Use the funds for almost any purpose, such as home improvements, debt consolidation or funding a large purchase.
• Secure lower interest rates by agreeing a better mortgage deal. Mortgage interest rates also tend to be much lower than those for a personal loan or credit card, making a remortgage a cheaper way to borrow money.
• Consolidate debts by paying off higher-interest loans and consolidating them into a single, more manageable mortgage payment.

There are also possible downsides to consider, which include:

• Increased debt. You are taking on a larger mortgage, which means higher monthly repayments and paying more interest over the life of the loan.
• The risk of negative equity. If house prices fall sharply, you could end up in negative equity, where you owe more on your mortgage than your home is worth. This makes it difficult to sell or remortgage again.
• The need to pay various fees, including potential early repayment charges, an arrangement fee, valuation fees and legal fees.
• The risk of repossession. When you take out a loan secured against your home, failing to keep up with the increased mortgage repayments means that your home could be repossessed.

You will usually need to work with a solicitor when releasing equity from your home or a buy-to-let property, and the team at JMW has a strong track record of success in delivering conveyancing services efficiently and reliably. We will discuss your needs and help you to determine the best approach to release equity from your property or secure a loan.