Can you remortgage to release equity for home improvements?
The short answer is yes, you can. In fact, there are two different options available to you.
First one is to remortgage. Whether you want to remortgage to extend your house, or want to upgrade your bathroom, remortgaging could help you to raise the funds you need.
Let’s say you want to add another room to your home, and you’ve got a quote for £30,000 for this work. If your mortgage is currently £200,000, then you could apply for a mortgage with a new lender of £230,000, with the additional money being used to fund your home improvements.
When you remortgage to build an extension - or carry out any other kind of home improvement work - it’s important to bear in mind that this is a long-term commitment, and you’ll need to repay the additional money you’ve borrowed over the term of the mortgage. That will mean higher monthly costs, so it’s important to fully assess whether you can afford this before committing to a remortgage for home improvements.
The other option that may be open to you is to borrow more with your existing lender, often known as a ‘further advance’. When you borrow more you’ll still need to go through the same affordability checks regardless of whether you stay with your existing lender or move to a new one, but if you are in the middle of a deal which has an Early Repayment Charge then staying put can be a more cost-effective option.
How does it work?
When you remortgage for an extension or to fund renovations, you’re releasing equity from your home.
Equity is the difference between what your property is worth and how much you owe on your mortgage.
As you pay back more of your mortgage, the amount of equity you have will usually go up - and it can also increase if your home increases in value.
So, if you bought a property five years ago for £300,000 using a £30,000 deposit, you would have taken out a mortgage for £270,000. That means your loan to value was 90%, and you had 10% equity in your property.
If you’ve now paid off a further £70,000 of your mortgage, and your property is still valued at £300,000, you now have 33% equity.
If you wanted to remortgage to try and reduce your monthly payments, you could remortgage to cover just the £200,000 owed on your property. But if you want to borrow more to fund home improvements, you’d look to increase your mortgage.
For example, you might remortgage for £250,000, if you have £50,000 of renovations to carry out.
Lenders typically reserve the best deals for those with taking out mortgages with a lower loan to value - so generally the more equity you’ll be leaving in your property, the better the deal you should get.
If you want to remortgage to release equity for work on your home, a mortgage advisor at L&C can talk you through the best options to suit your circumstances.
What to think about before taking out a remortgage for home improvements
Taking out a remortgage to release equity for home improvements might seem like a great idea, but there are some things you need to think about before going ahead.
Increased mortgage repayments
When you borrow more, you’ll have to pay more back. It might sound obvious, but it’s something you need to consider for the future. What if you change jobs, or your circumstances change? Will you still be able to afford the repayments?
As well as the increased monthly repayments, it’s important to take into account any set up costs on a new mortgage deal too. Speaking to a fee free mortgage advisor like L&C can be beneficial, helping you to understand what you can afford and what it will cost before making the commitment to remortgage. You can also use our remortgage for home improvements calculator to help plan your finances.
Early Repayment Charges
If you’re switching mortgage lenders and leaving your current deal before the end of its term you’ll likely be subject to an Early Repayment Charge (ERC), which can be significant. You’ll need to take this into account if you choose to remortgage, and weigh up whether it’s worth going ahead with the change now or waiting until your current deal ends.
If you do have an ERC, it might be possible to borrow more on your current mortgage and L&C can help you weigh up your options. Alternatively, you may want to consider other options like a credit card or personal loan to fund your home improvements, both of which may work out cheaper in the long-run than remortgaging for smaller amounts of borrowing.
The cost of renovations vs. the value added
Whether you’re building an extension or doing up your kitchen, it’s generally thought that home improvements will add value to your home - but this isn’t always the case. It’s a good idea to understand whether the benefit of the work you’re doing outweighs the costs, particularly if you’re undertaking improvement works with the hope of adding value to your home before selling it.
