Are Remortgage Rates Higher if You’re Releasing Equity?

Unlocking the capital you’ve been building up in a property is a common reason to remortgage, but what effect does releasing equity have on your interest rate?

Here, we explore whether the rates are any different for refinancing homeowners who are borrowing more and discuss whether the alternative options are more cost-effective.

Will you get hit with higher rates if you’re releasing equity?

Mortgage lenders don’t impose higher interest rates on remortgage customers purely because they are releasing equity, but the rate you will pay under these circumstances may be higher because borrowing more means increasing your loan-to-value (LTV) ratio.

The LTV is among the biggest factors that determines the rate you will end up with, so it’s accurate to say that releasing equity when remortgaging has an indirect effect on your rate.

Example

Here’s an example of how releasing equity could impact the LTV, and therefore the interest rate on your remortgage:

Let’s say your home is worth £250,000 and you have £188,000 left on your mortgage, your LTV ratio would be 75%, which would put you in good stead to secure a favourable interest rate for a residential property.

If, however, you want to release some equity when you remortgage – we’ll use £12,000 for example purposes – this would increase your total borrowing to £200,000 and the LTV to 80%. Therefore, the rates might be higher than they would be without the extra borrowing.

What rate to expect if you’re releasing equity

This will largely depend on what your LTV ratio is with the extra borrowing factored in.

The lowest interest rates tend to kick in at around the 60% LTV mark and they generally rise incrementally at 75%, 80% and 90-95%. At the time of writing (April 2023), an LTV of 60-75% will get you a rate of under 4% as the Bank of England’s base rate remains relatively high.

Those with a higher LTV than 75% might see their rate creep up beyond the 4% mark, with the choice of accessible lenders and products reducing the closer it gets to 90-95%.

Your loan-to-value ratio isn’t the only factor that can impact your interest rate, with lenders also taking factors such as credit history into account when deciding what kind of deal you qualify for. Variables including the Bank of England’s base rate and the overall strength of the market may also determine the quality of the products available at the time of your remortgage.

Is there a more cost-effective way to release equity?

If the rates you’ve been quoted to remortgage are on the high side or you’re unable to refinance without incurring heavy fees, there are alternative ways to release equity.

Whether you will be offered a more attractive deal for one of these options will come down to how creditworthy the finance provider believes you are and the strength of your application.

Potential alternatives include…

• Equity release mortgages: It is possible to unlock capital using an equity release product, such as a lifetime mortgage. You can still explore this option while there’s balance left to pay on your mortgage, but be sure to compare the overall cost with that of a remortgage and have a broker explain the pros and cons of both options to you.
• Secured loans: This is a secondary mortgage secured against your property to provide you with capital if you cannot or do not wish to remortgage to release equity. The rates can be higher than they are for refinancing, but it might be worth reviewing the overall cost of both options if remortgaging would mean paying early repayment charges.
• Further advance: Mortgage lenders can allow you to borrow more on your existing deal without going through the full remortgage process. This can be done at their discretion and the extra borrowing will typically be at a different rate to your main mortgage. Whether the overall cost is less than a remortgage will vary from person to person.

If you need to release equity from your home and want to find out what the most cost-effective way of doing it, make an enquiry with us so we can match you with a broker who specialises in this area. They can go over every option with you and help you choose the right one.