Capital Raising Mortgages
The world of mortgages can be complex, but understanding the potential of your home’s equity can open doors to numerous opportunities. Whether you’re looking to enhance your living space, consolidate debts, or fund significant life events, a capital raising mortgage might be the solution you’ve been seeking.
Homeowners can tap into the value of their property, providing flexibility and financial freedom.
Our guide will walk you through how capital raising mortgages work, what you can spend the money on, and where to get one.
What is a capital raising mortgage?
Capital raising mortgages are a way for homeowners to borrow money against the equity in their home.
You can borrow extra money (raising capital) when applying for a remortgage. This is where you switch your mortgage to a new lender.
Remortgages are a popular way to get a new interest rate deal when the current one is about to finish. Because you are applying for a new mortgage, some people also choose to borrow more than their current mortgage, taking advantage of their home equity.
This extra money could be for home improvements, a new car, a holiday or for debt consolidation. Apart from being relatively straightforward and convenient, this additional borrowing will be on the new interest rate as well.
What is home equity?
Home equity is a term that refers to how much of your home you own outright.
Let’s look at a simple example of a first time buyer. They save up a 10% mortgage deposit and borrow the remaining 90%.
At the start of their property journey, their home equity is 10%.
| 10% DEPOSIT | |
|---|---|
| Purchase price | £250,000 |
| 10% deposit | £25,000 |
| Mortgage needed | £225,000 |
| Loan to value | 90% |
| 10% equity | £25,000 |
With time, most people find that their equity stake increases. This can happen for two reasons:
- Your house value goes up. If the property market rises, your house will be worth more money. This will make the equity amount larger.
- Your mortgage balance goes down. If you have a repayment mortgage, then every month you are slowly paying back what you borrowed. This increases the equity, the amount that you own outright.
Working out your equity
To work out your home equity you need two numbers:
- What your property is worth
- Your mortgage balance
Property value
Less mortgage balance
Equals home equity
£400,000 value
£250,000 mortgage
£150,000 equity
How much can you borrow?
When you want to raise capital via a remortgage the amount you can borrow will depend on the available equity, and your own affordability situation.
Remember that all mortgages now require you to provide proof of your income and the lender needs to check that you can afford the new repayments.
Equity
When you borrow more with a remortgage, you eat into the equity in your home. There has to be enough equity for the amount you need and you can’t borrow all of it, otherwise you would have a 100% mortgage.
With a good credit score there are remortgages available up to 90% LTV. This means the total mortgage can be 90% of your property value.
Here’s a quick example:
| CURRENT MORTGAGE 75% LTV | |
|---|---|
| Property value | £300,000 |
| Mortgage | £225,000 |
| Equity | £75,000 |
| Loan to value | 75% |
See what happens if we capital raise 45K.
| NEW MORTGAGE - BORROW £270,000 | |
|---|---|
| Property value | £300,000 |
| Mortgage | £225,000 |
| Capital raise | £45,000 |
| Equity | £30,000 |
| Loan to value | 90% |
Affordability
Lenders still use income multiples to provide a guide to the maximum mortgage for a given income.
For example: £50,000pa earnings x 4 = £200,000 potential mortgage.
But nowadays affordability is much more important. This is an in-depth look at your earnings, and your expenditure, to see what spare income you have. The lender needs to be happy that all of these figures tally up correctly.
If they deem the new mortgage to be unaffordable they may reduce the loan amount or they may even decline the application.
Most borrowers understand that their credit report and credit score have a big influence on a lenders decision.
But lenders now also work out your debt-to income ratio (DTI). This calculation shows them how much of your gross income is spent on debt repayments. If the DTI is too high then they may reduce the loan on offer.
So the amount you can borrow will be affected by all of these aspects.
You absolutely need to have enough equity if you want to borrow more, but the final amount will depend on your finances.
CONTACT A REMORTGAGE EXPERT
If you wish to investigate your re-mortgage options we can put you in touch with a fully qualified whole of market mortgage broker.
What can the money be used for?
Most people borrow extra money for home improvements or to consolidate debts.
But you are able to release some capital to fund other types of projects as well. Each lender has their own list of approved reasons.
Here’s some examples:
Home improvements
Enhancing your living space not only adds comfort but can also increase the value of your property. Whether it’s a new kitchen, an extension, or landscaping the garden, home improvements can be a wise investment in the long run.
You will find more useful information in our Borrowing for home improvements guide.
New car
Whether you’re upgrading to a more reliable vehicle or fulfilling a dream of owning an electric car, raising capital can help you make that purchase without the need for high-interest car loans.
Holiday
Everyone deserves a break. Using your equity can fund that dream holiday you’ve always wanted, allowing you to create lasting memories without financial stress.
Wedding
Celebrating love can be expensive. From the venue to the honeymoon, raising capital can ensure you have the wedding of your dreams without compromising on your wishes.
School fees
Private school fees, university fees, or later life learning. You can raise money against your house to pay for these.
Property investment
Depending on the cost, you can release equity to fund the deposit, or the whole purchase price, of another house. Second home, holiday home, holiday let, serviced accommodation, airbnb, buy to let are all possibilities.
Debt consolidation
Managing multiple debts can be challenging. Consolidating debts into a single, manageable payment can reduce stress and potentially lower interest rates, saving you money in the long run.
Gift
Whether it’s helping a loved one with a mortgage deposit on their first home or funding a grandchild’s education, using your equity can allow you to give generous gifts that have a lasting impact.
Pay off other mortgages
If you have multiple properties or mortgages, using your equity to clear one or more of these can simplify your finances and reduce monthly outgoings.
Medical Expenses
Health is invaluable. A remortgage can help cover unexpected medical bills, surgeries, or treatments, ensuring you or your loved ones receive the best care without financial burden.
Legal Expenses
Legal matters, whether planned like estate planning or unexpected like litigation, can be costly. Having the funds to cover these expenses ensures you get the best representation and advice.
Buying land
Whether you’re looking to invest in some woodland, or buy a smallholding, purchasing land can be a strategic move for future growth.
You can’t capital raise to
Fund a business start-up
Pay off gambling debts
Buy shares
Pay a tax bill
Is remortgaging the same as releasing equity?
Do you have to remortgage and release equity at the same time. Or is there another way?
How does remortgaging work?
Whether you are remortgaging for the same amount, or raising extra capital, the remortgage process is the same.
The only slight difference is that the lender may ask for some proof, or additional info, relating to the extra money you need. This would certainly be required if you were borrowing a substantial amount for home improvements.
Let’s explain using the previous details.
You currently have a mortgage of £225,000 on a property worth £300,000. This is a 75% LTV mortgage.
You would like to borrow an extra £45,000, taking the total loan up to £270,000. This is a 90% LTV mortgage.
Remortgaging involves moving your current loan to a new lender. You have some choice over the interest rates, repayment method and mortgage term. As well as the amount you apply for. The lender will need to get a valuation for your property, but this may not require a physical inspection.
Once the mortgage is approved the solicitor will send £225,000 to your previous lender, to pay off that mortgage. And the extra £45,000 will be transferred to your bank account.
What will happen to my mortgage repayments?
Your monthly repayments will obviously change, you are borrowing more money. But how they will change will depend on the repayment method, term and interest rate.
It is certainly possible to pay less if you switch to a cheaper interest rate and extend the repayment term.
How long does it take?
Ideally, when you remortgage you should allow up to 3 months, from start to finish.
Most of the time an average remortgage application will take 4-8 weeks. But occasionally there can be hitches and glitches that delay the process, and many of these cannot be planned for.
Is a remortgage a good way to borrow extra money?
Largely, yes it is a good way.
Using a main mortgage, with a first legal charge on your property, is often the cheapest way to borrow money.
This is because the lender secures the mortgage against your home (so if you don’t keep up with the repayments they can sell it.)
Where your mortgage is now larger than before, it does place a greater risk on your property.
That said, it is a convenient and cost effective way of borrowing money.
However, remortgages are not really suitable for borrowing small amounts of money; £5000, £10,000 etc. This is due to the fees and costs of moving a mortgage.
For these you may want to consider a personal loan instead.
Getting the right advice
Trying to work out which lender offers the best deal for a capital raising mortgage can be a bit tricky.
They all have their own set of rules:
- Some will allow debt consolidation, some won’t.
- Some will be OK if you have bad credit, some won’t.
- Some let you borrow up to 90% LTV, some don’t.
Why not let a qualified mortgage broker search through thousands of different schemes to find the best remortgage deal for you?
Whether you want to build an extension, buy a boat, invest in another property or consolidate expensive debts, they can find a deal that suits you.
Let Respect Mortgages introduce you to a remortgage expert, who can help you raise the extra cash you need.
Or call us on 0330 030 5050.
frequently asked questions
You can only increase the size of your mortgage if you have enough equity to borrow against. If you have only purchased your property recently, with a high LTV, you may find that it’s not possible.
The amount you can borrow will depend on the equity and your own financial affordability. The overall maximum LTV is around 90% and this includes the mortgage you owe now.
Learn more: Remortgaging when your house value has increased
You can decide to remortgage at any time but you need to be aware of any early repayment charges first. These can run into many thousands of pounds.
This is particularly important if you wish to release equity while still in a fixed rate deal.
There can be added complications if you try to switch lenders within six months of owning a property. If this is the case then you may need a day one remortgage from a specialist broker.
Learn more Can you remortgage early?
Part of the remortgage process does require a solicitor or conveyancer. One of their responsibilities is to remove the old lenders legal charge and register an additional charge for the new one. You can use your own solicitor but it may be cheaper if you use the lender’s.
Learn more: Do you need a solicitor to remortgage?
If you have unsecured debts such as loans and credit cards, it is possible to use a capital raising mortgage to pay them off. This is known as debt consolidation.
This will usually result in an overall reduction in monthly payments towards the mortgage and other debts.
This option is not right for everyone. Here’s some extra info to explain how it works:
Can you remortgage to pay off debt?
Debt Consolidation Remortgages
If you have some bad credit, or a low credit score, don’t despair. There are options available to you. What’s possible will depend on the extent of your credit issues and your overall financial situation.
Learn more: Can you remortgage with bad credit?
There is no requirement for you to pay tax on any extra money you borrow. The amount you capital raise is yours anyway, it forms part of the value of your home.
There are a few different ways to borrow a capital sum and increasing the size of your mortgage may not be the best option for everyone.
Personal Loan: Unsecured personal loans are available from banks and other lenders. You can borrow from £1000 to £25,000. Loan terms range from 1 – 10 years. Unsecured loans generally have higher interest rates than secured loans (mortgages are secured loans).
Further Advance: A further advance is a type of mortgage. If you need some extra money you can apply to your current lender for a further advance. If granted, this additional loan is secured against your home and has separate monthly repayments. It’s a cost effective way of borrowing but you will need to meet your lenders financial criteria, including affordability.
Second Charge Mortgage: If you are unable to remortgage, and your existing lender can’t provide you with a further advance, there is another option. A second charge mortgage is a new loan, taken out while leaving your main mortgage untouched, and is also secured against your home. They are very flexible and quite quick to setup, but they are a bit more expensive than a normal capital raising mortgage.
Learn more: Does a secured loan affect remortgaging?
Learn more: Are second charge mortgages regulated?
Learn more: Second charge vs further advance
Learn more: Can you release equity without remortgaging?
Ready to explore your options?
If you’re just about to start your mortgage journey and could use the guiding hand of a professional, don’t hesitate to reach out to a reputable mortgage broker.
An independent mortgage broker can access over 100 lenders on your behalf. They will make the process smoother and more profitable than going it alone.
Keep reading, keep asking questions. The more you know, the better decisions you can make.
