Many people dream of renovating their home, whether that’s to improve their living situation or to add value to the property. However, home renovations can be expensive, and funding the projects can prove a challenge for many.
One solution is to release capital that you have built up throughout the duration of your mortgage, providing yourself with a cash injection.
In this article, we will explore how releasing capital works, the potential benefits it offers, and the considerations that should be made before proceeding.
What does releasing capital mean?
Capital, or equity, refers to the percentage of the property that you own outright. It is calculated as the difference between the market value of the property and the outstanding balance of any mortgage.
For example, if the market value of your home is £300,000 and your outstanding mortgage balance is £100,000, the amount of capital you have in the property is £200,000.
Releasing capital refers to the process of accessing some of this value through remortgaging or through financial products designed specifically for releasing capital.
How to release capital for home improvements:
For those looking to release capital in their property, there are several methods potentially available, each suited to different financial needs and situations.
Remortgaging
If you have an existing mortgage, remortgaging may allow you to borrow additional funds based on the increase in your property’s value. This involves switching to a new mortgage deal, often with a higher borrowing limit.
It should be noted, however, that as a result of switching to a new mortgage deal your interest rates are also subject to change, so you may end up paying a higher amount of interest.
Advantages:
- May offer more competitive rates when compared to remaining with your existing lender and taking out a Second Charge or Further Advance.
- Borrowing can be consolidated into one single monthly payment
Considerations:
- Remortgage to a new lender may offer less competitive interest rates compared to staying with your existing lender.
- Your ability to borrow is dependent on income, credit checks and specific lender criteria.
- You may be subject to Early Repayment Charges (ERCs) if you exit you current mortgage deal before your current mortgage term comes to an end.
Second Charge Mortgages
A second charge mortgage is an additional loan secured against your property. Unlike a remortgage scenario, your existing mortgage remains untouched and an entirely separate, new product is taken out.
Advantages:
- Can be beneficial if your current mortgage product offers favourable interest rates and you do not wish to change.
- Second Charge mortgages do not tie you to your existing lender, meaning a wider range of options are available, each with their own rates and terms.
Considerations:
- Interest rates associated with second charge mortgages are typically higher than with a standard mortgage.
- You will be responsible for multiple monthly payments as your payments are not consolidated.
Further Advance
A further advance operates similarly to a Second Charge Mortgage, with the key differential being that the new loan is taken out with your existing lender. Further Advances are also secured against the property.
Advantages:
- Generally more favourable rates for Further Advances compared to Second Charge Mortgages.
- Can be beneficial if your current mortgage product offers favourable interest rates and you do not wish to change.
Considerations:
- Further advances are considered to be an entirely new mortgage product, and therefore you will be subject to the same credit score and affordability checks as with any mortgage product.
Lifetime Mortgages (for over 55’s)
Lifetime mortgages are a method of releasing capital designed for homeowners aged 55 or over. They involve borrowing against the value of your property, with the loan repaid in full when the property is sold (typically after death or transfer to a long term care facility).
Advantages:
- In most cases there are no monthly repayments required
- Lifetime mortgages allow for the borrower to retain ownership of their home.
Considerations:
- Interest rolls up over time if payments are not made,, reducing the value of your overall estate.
- Lifetime mortgages may impact your eligibility for means-tested benefits.
The benefits of releasing capital to fund home improvements
Releasing capital to fund home improvements has several key advantages:
- Increased property value: Strategic home improvements, such as creating additional bedroom or modernising a kitchen, can increase the market value of your property.
- Customised living spaces: If you don’t plan to sell in the immediate future, you can customise your home to better suit your needs without having to move house.
- Flexibility: Releasing capital provides a lump sum cash injection, offering flexibility to allocate the funds to multiple home improvements as required.
Key considerations before releasing capital from your home
The decision to release equity from your property is significant, and it is important that proper consideration is given to the following factors before making your choice:
- Long-term financial impact
Releasing capital from your property may reduce your ownership percentage in your property, and as a result may increase your loan-to-value (LTV). Typically, interest rates are higher at higher LTV ratios. It is crucial to evaluate whether the potential benefits, such an increase in house value, outweigh the costs associated.
- Affordability
Ensure that you are able to afford the monthly repayments if opting to remortgage or to take out a second charge mortgage. Missing payments may put your home at risk.
- Future Plans
Consider any future plans, such as retirement, growing a family or selling the property, prior to making your decision. Releasing capital may not be the correct decision for you if you plan to downsize or move in the short term.
- Seek professional advice
Consulting with a qualified mortgage adviser is essential. Every client’s circumstances are completely unique, and there is no one-size-fits-all solution to releasing equity.
At Cooper Associates Mortgages, we strive to truly understand our clients’ needs and unique financial circumstances to offer bespoke advice to each individual situation.
If you wish to get in touch with a mortgage adviser to discuss your options for releasing capital from your property, get in touch today. Our friendly and expert advisers will help you to explore the options available to you and provide a solution tailor to your specific needs.
