Why should you remortgage when the value of your home has increased?

By remortgaging your home when its value increases, you can leverage the higher equity for lower interest rates or access extra funds if needed. 

What is remortgaging?

Remortgaging involves changing your existing mortgage to a new one, typically with a different lender.

The idea behind remortgaging is to potentially take advantage of lower interest rates or release equity for other purposes.

In recent years, remortgaging has become more attractive due to soaring interest rates and an increase in the average house price in the UK.

Remortgaging offers homeowners a means to secure more favourable loan terms and mitigate the impact of rising borrowing costs.

What is equity?

In homeownership, equity refers to the portion of the property you own outright.

You calculate equity in the following way: 

Minus the outstanding mortgage balance from your home's current market value.

For example, if your home's value is £300,000 and you owe £200,000, you'd calculate equity like this:

Home value (£300,000) – outstanding loan amount (£200,000) = Equity (£100,000) 

Homeowners sometimes use their equity for various financial purposes.

What is meant by the loan-to-value (LTV) ratio?

The LTV ratio is a metric that indicates what percentage of the property's value or purchase price is funded by a mortgage.

You can calculate your home's LTV ratio using this formula:

(Loan amount / property value) x 100 = LTV ratio

Lenders use the LTV ratio to determine the risk associated with a mortgage. For example, a lower LTV ratio indicates a larger deposit, suggesting less risk for the lender. 

On the contrary, a higher LTV ratio suggests a smaller deposit and potentially higher risk. This means borrowers with lower LTV ratios typically pay a lower interest rate for their mortgages over the life of the loan. 

Why should I remortgage when the value of my home value has increased?

If the value of your home increases substantially, you can remortgage it as a strategic financial move.

Here are some reasons why homeowners remortgage their homes:

• Improved LTV ratio: An increased property value lowers the LTV ratio, as the outstanding mortgage amount remains constant while the value of your property rises. 
• Increased equity: A higher property value increases equity. Homeowners can also leverage this equity via remortgaging to access funds for various means, such as home improvements.
• Lower interest rates: An improved LTV ratio before remortgaging may allow you to access lower interest rates.
• Lower monthly payments: Lower interest rates or different mortgage terms from remortgaging may reduce your monthly repayments.
• Financial flexibility: Having access to equity in your home provides more financial flexibility, such as reinvesting in your home or pursuing investment opportunities. However, you should consider whether it’s worth accessing money through other means instead of accessing equity in your property, as your LTV will rise.
• Potential for shorter terms: If you're in a favourable financial position, you could switch to a shorter mortgage term. Doing this will allow you to repay your loan faster and save on interest, but your monthly payments could rise.

What are the advantages of remortgaging?

Below are some of the most significant advantages of remortgaging your home if its value increases:

1. Lower interest rates: Remortgaging may allow you to get a better mortgage with lower interest rates, especially if market conditions or your creditworthiness have improved since your initial mortgage.
2. Access to equity: When your home's value increases, remortgaging allows you to tap into accumulated equity you can use for other financial goals.
3. Debt consolidation: Remortgaging allows you to access money to consolidate high-interest debts, but you should consider alternative ways to clear debt and get financial advice first. By accessing equity in your property, your LTV may rise, and, potentially, your monthly payments.

What are the disadvantages of remortgaging?

While remortgaging has its advantages, it has its cons as well.

Here are three key disadvantages to consider:

1. Costs and fees: Remortgaging involves various fees. These may include arrangement, legal and valuation fees, as well as potential early repayment charges from your lender. These upfront costs can offset potential savings, so it's vital to consider if remortgaging is right for you.
2. Risk of higher interest rates: While there's the potential to get a lower interest rate, the opposite is also true. For instance, if you lock into a new low rate and they soar, you might end up paying higher interest rates when you remortgage, possibly negating the financial benefits.
3. Extended loan term: If you remortgage your home to lower your monthly payments, you might opt for a longer loan term. Doing this can provide monthly relief in the short term, but you'll pay more interest in the long term.

Seek expert financial advice

Remortgaging your home when its value rises could be a strategic financial move, as you can lower your LTV ratio or release equity from your property. 

However, assessing the feasibility of remortgaging your home can be tricky, so it's strongly advised you find a mortgage broker who can offer you expert financial advice.

A mortgage broker can outline the pros and cons of remortgaging your home and also find the best rates for you.