equity release from mortgage - how to calculate it theoretically

bd10

Hi Forum,

I hope you can help me. I am totally puzzled how equity releases/withdrawals from a mortgage work. Spent hours on the phone to banks and none would tell me the mechanics, I would have to make an application. Not really helpful as I need to understand the mechanics, how one can calculate it.

Suppose I buy a first property for 350k with 100k equity. Capital repayment over 25y initial term and no overpayments. Interest rate I assume to be 2.7% fixed for the first 5 years. Also, the property will appreciate by 4% per year. All assumptions.

Now come year 5:
With my downpayments, the mortgage will have a balance of 212k and the property will be worth 426k. Now I will have to remortgage. With a new 80% LTV mortgage over a 20 year term, I would only need 85k equity, or I could borrow 341k against the property. If I were to borrow 341k and pay-off the 212k balance, I would be left with 214k, minus the 85k equity required for 80% LTV, would I not have a 129k excess for release?

Am I making any silly mistakes in this calculation? Or, how much equity could I theoretically take out at that point?

Any pointers would be most appreciated!

Thanks,

Ben

TBeckett100

You can only borrow as much as they seem you can afford to repay. Your home may go up in value to a million quid, but you can only obtain a mortgage based on your income

amnblog

I suspect you confused the bank staff Ben.


You can borrow at the time based on the property value at the time and up to the loan to value limit on the product.


If you are changing lender you bank the total of the new loan less the settlement figure on the previous one.


If you are sticking with the same lender you bank the difference between the new loan and the balance of the old one.

silvercar

Now come year 5:
With my downpayments, the mortgage will have a balance of 212k and the property will be worth 426k. Now I will have to remortgage. With a new 80% LTV mortgage over a 20 year term, I would only need 85k equity, or I could borrow 341k against the property. If I were to borrow 341k and pay-off the 212k balance, I would be left with 214k, minus the 85k equity required for 80% LTV, would I not have a 129k excess for release?

yes,...but you would now be making mortgage payments based on a 341k repayment mortgage not a 250k one. So your monthly mortgage payments would be higher. Can you afford this? More to the point would a lender think you can afford it?

You may say that you could put the 129k in a savings account and use the interest to fund the payments. But you will be hard pushed to consistently find a savings rate that is higher than your mortgage rate, so would always be losing.

Keep rinsing and repeating and you end up with an eye watering mortgage and eye opening monthly repayments. Couple that with lenders requiring you to repay the mortgage before you are too old and shorter terms mean higher monthly payments.