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Homeowner loan to raise cash

13 June 2005

Equity seems to have become the buzz word around the finance sector these days, but most consumers haven't been given the insight into what equity is, or how they can use it to their advantage.

By definition, equity is "the value of property after you have paid any mortgage or charges relating to it".

Put simply, it is how much of your mortgage you have actually paid off.

So a couple who own property worth £120,000 and owe £70,000 to the bank, have £50,000 of equity in their home. If this couple were to sell their home, the equity would be the amount of money they would be able to take away with them.

The equity, which many property owners have in their homes does not have stay tied up to the bricks and mortar. Many property owners are now utilising the extra funds for a range of uses, including home improvements, cars, holidays and investment properties.

Utilising this equity has numerous advantages. For example, buying a new car or financing an extension through equity means that the funds can be easily obtained, as they can be secured against your property. Interest charges on the additional funds will be at the usually cheaper mortgage rates, rather than personal loan or car finance rates.

Remortgaging your current property is the best way to release these equity funds.

A remortgage allows a current mortgage holder to access additional equity in their property. There are a number of ways in which this can be done, and countless products available from banks and building societies, all with their own pros and cons.

The most popular way is to remortgage property to a set amount, releasing cash which can be utilised by the owner. Note that most mortgage providers will allow you to borrow up to 95 per cent of the value so our couple with the £120,000 property could remortgage up to a maximum of £114,000, therefore releasing £44,000 of equity in their property.

Those remortgaging their property are also not restricted to staying with their current mortgage provider, allowing them to shop around for a great new deal, and also avoid new loan or remortgage charges used by some banks.

But be warned. Releasing equity in your home will mean a larger mortgage, which means higher interest charges, bigger monthly repayments or a longer loan term. Before undertaking a remortgage, property owners would be advised to seek professional financial advice to ensure they can meet the repayments.