The majority of homeowners remortgage to reduce their monthly mortgage repayments when their existing mortgage deal ends by switching to a lower interest rate. Despite recent increases in the Bank of England base rate, mortgage interest rates remain low, making remortgaging a cheap way to borrow money compared to, for example, taking out a personal loan. Read more in our article Four good reasons to remortgage right now.
However, you can also remortgage to release equity tied up in your home that can be passed on to your children, particularly if you have paid off a significant amount of your mortgage and the value of your property has increased since you bought it. Find out more in our guide When is the best time to remortgage?
The amount of equity you have in your home is worked out by deducting any outstanding mortgage from the market value of your property. This gives you the loan-to-value (LTV) ratio. For example, if you bought your home for £300,000 with a 25% deposit, and a £150,000 mortgage, the LTV is 75%, and you have £75,000 equity. Over time, the amount of equity you have depends on how much of your mortgage you pay off, and the current market value of your home. For example, if after 10 years, your home is worth £400,000, your equity increases to £175,000.
There are downsides to remortgaging, of course, as you might face a penalty if you do so before your existing mortgage deal has come to an end. If you’re releasing equity, you’re also increasing the size of your mortgage, and therefore your monthly repayments. Plus, if you release a large amount of equity your LTV will increase, and this could reduce your chances of securing a cheap mortgage deal. It might be that there is a cheaper way to borrow the money that may suit you better, but this will entirely depend on your personal circumstances.