Owning a home is more than just a place to live; it’s an investment that can grow over time.
As you pay off your mortgage and property values increase, you build equity in your home. This equity can be a valuable financial resource, allowing homeowners to access funds for various needs such as home improvements, education expenses, or even a dream holiday.
But what if you have a fixed-rate mortgage?
Fixed-rate mortgages offer stability in monthly payments, but they often come with specific terms and conditions that might make releasing equity a complex matter.
The question of whether you can release equity on a fixed-rate mortgage is one that many UK homeowners grapple with. It’s a question that doesn’t have a straightforward answer, as it intertwines with various financial, legal, and personal considerations.
This article aims to explore the concept of releasing equity. We go into the intricacies of fixed-rate mortgages, and shed light on the possibilities and challenges of accessing your home’s equity while on a fixed rate.
Understanding Fixed Rate Mortgages
A fixed-rate mortgage is a type of home loan where the interest rate remains constant for a set period, typically ranging from two to ten years in the UK.
This means that regardless of fluctuations in the broader interest rate environment, your monthly mortgage payments remain the same during the fixed-rate term.
The primary benefit of a fixed-rate mortgage is the certainty it provides.
Knowing that your interest rate won’t change allows for easier budgeting and financial planning. It offers protection against any interest rate rises, ensuring that your payments remain manageable even if market rates increase.
However, this stability comes with certain limitations.
Fixed-rate mortgages have Early Repayment Charges (ERCs), which can apply if you decide to pay off the mortgage early or make significant overpayments during the fixed-rate period.
These charges can be substantial, sometimes amounting to thousands of pounds.
Additionally, if market interest rates fall, you could find yourself paying a higher rate than what’s currently available. This could lead to a feeling of being “locked in” at an unfavourable rate, especially if the fixed term is lengthy.
Understanding ERCs
Early Repayment Charges are a critical consideration when exploring the possibility of releasing equity on a fixed-rate mortgage.
They are fees imposed by the lender to compensate for the potential loss of interest income if you break the fixed-rate agreement.
ERCs can vary widely between lenders and mortgage products, so understanding the specific terms of your mortgage is vital.
Releasing Equity – What Does It Mean?
Releasing equity refers to the process of accessing the financial value tied up in your property.
As you pay off your mortgage and if property values increase, the difference between the remaining mortgage balance and the property’s market value represents your equity. It’s the amount of your home that you own outright.
This equity can be a substantial financial asset, and there are various ways to tap into it.
Methods of Releasing Equity:
Remortgaging
This involves taking out a new mortgage that’s larger than your existing one, allowing you to access some of the equity in your home.
Home Equity Loan
Also known as a second charge mortgage, a home equity loan allows you to borrow against the equity in your property without altering your existing mortgage. This can be a viable option if remortgaging isn’t suitable.
Equity Release Schemes
These are specialist financial products designed for older homeowners (55+), allowing them to access equity without regular repayments. Equity release plans include options like lifetime mortgages and home reversion plans .
Why People Choose to Release Equity
Home Improvements and Renovations:
- Enhancing the living space, adding extensions, or upgrading facilities.
- Increasing the property’s market value and enhancing its appeal.
Debt Consolidation:
- Paying off high-interest debts like credit cards or personal loans.
- Simplifying finances by consolidating multiple debts into one secured loan.
Funding Major Life Events:
- Supporting children’s education or helping them onto the property ladder.
- Financing weddings, anniversaries, or other significant family milestones.
Investment Opportunities:
- Investing in a new business venture or expanding an existing one.
- Purchasing additional property for rental income or capital growth.
Enhancing Lifestyle and Leisure:
- Taking a dream holiday or pursuing hobbies and interests.
- Providing a financial cushion for early retirement or reduced working hours.
Healthcare and Support Needs:
- Funding medical treatments, care support, or accessibility modifications to the home.
Generational Wealth Planning:
- Gifting funds to family members or setting up trusts for future generations.
You will find more useful information in our guide to Borrowing for home improvements
Can you release equity on a fixed rate mortgage?
Yes, you can release equity with a fixed rate mortgage, but you need to be a bit careful.
Most people will use a capital raising remortgage to release equity from their home. A remortgage means moving your mortgage to a new lender and this will trigger any exit fees associated with your fixed rate.
Now it maybe that your fixed rate is a bit rubbish and you want to change it anyway.
There’s nothing to stop you moving your mortgage, you just need to understand how much you are going to be charged to leave.
The alternative is to find some other way of borrowing the cash, that doesn’t involve your main fixed rate mortgage.
Solutions and Strategies
Releasing equity is a process that requires careful consideration and strategic planning.
One of the first steps in this process is to thoroughly assess any Early Repayment Charges (ERCs) that may apply.
Understanding these charges and calculating their potential impact is crucial in weighing the benefits and costs of releasing equity. It’s important to establish how much you will be charged and how long this fee is applicable for.
Alternative methods of equity release might also be explored. Options such as a further advance or second charge mortgage could provide a way to access equity without triggering ERCs.
Specialist equity release schemes might be an appropriate solution, depending on age and individual circumstances.
Or, a further strategy could be to wait…
If the fixed-rate fee period is nearing its end, waiting might be a wise strategy to avoid or minimise ERCs.
In fact, if the end of the fee period is just a few months away, you can apply for a new mortgage now and just delay starting it. Don’t worry about remembering, your mortgage broker can do all of this for you.
QUICK FIRE OPTIONS
REMORTGAGE TO A NEW LENDER
Switch your whole mortgage to a new lender, and borrow the extra money at the same time. Remortgaging will incur ERC’s from your current deal, so you need to be sure its the right decision.
FURTHER ADVANCE
Ask your current lender for some more money. A further advance is a good alternative, but it will depend on the equity you have and the reason for wanting the extra money (some lenders are fussy about this).
SECOND CHARGE MORTGAGE
This is a bit like getting a further advance, but you borrow just the extra you need from a new lender. Second charge rates will be more expensive, but the lenders are flexible.
UNSECURED PERSONAL LOAN
Personal loans are not linked to your home, and you borrow upto £25,000-£40,000 depending on your status. The interest rates should be pretty good, but because you pay it back over a shorter term, the monthly payments could be a bit high.
EQUITY RELEASE
These are mortgages designed for homeowners over 55. There’s a few different types and generally you don’t need to make any monthly payments. But, the lenders only offer low loan to value options.
WAIT IT OUT
After doing the sums, waiting until the ERC period finishes could be the best option. You can then remortgage to a new lender and a new deal. Remortgages take 4-8 weeks to go through, so you can apply for the new loan ahead of time and just let it wait until the best time to start.
Remember
Whether you choose to borrow via a mortgage, secured loan or personal loan, you need to have enough spare income to be able to afford the repayments.
All lenders will carry out these checks.
It’s always a good idea to get some advice from a qualified mortgage broker, they can make sure any decisions are right for you.
What we want to avoid is paying unnecessary exit fees.
What we also want to avoid is a new loan arrangement negatively affecting your ability to remortgage in the future.
(Like a long term secured loan with hefty exit fees)
Final thoughts
Releasing equity on a fixed-rate mortgage is a big decision for any homeowner. It can help you reach different goals, like fixing up your home, paying off debts, or making big life changes. But it’s not always easy, and there are things you need to think about.
Fixed-rate mortgages have rules, and sometimes there are extra charges if you want to release equity. You need to understand what this means for your money and your future plans.
Hopefully this article has given you some ideas on how to go about releasing equity without remortgaging. You might need to look at the charges, think about other ways to get the money, or (preferably) talk to a mortgage expert.
Releasing equity can be a good thing if you do it the right way.
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.
