Releasing cash/equity after house value increase

joedyer123

Hi all,

Below is a hypothetical (but also realistic) situation:

£320k house purchased

£32k deposit + £288k mortgage (4.5% over 28 years =circa £1500/month)

In 5 years, having overpaid on the mortgage by around £200-£250/month) and the value having increased by 20%…

£384k estimated house value 

£141k estimated equity (£32k deposit + £45k paid off + £64k value increase)

If we were to remortgage to release some equity (let’s say £41k to bring down the equity to a round £100k), is this considered a “free” £41k in the sense of it’s our cash?

Naturally it wouldn’t be “free” as I assume we would have to take a new mortgage out at £284k (£384k estimated value minus £100k equity) so almost the same mortgage as we started off with 5 years before this situation (so could either see monthly payments increase as it would be over 23 years vs 28 years OR go for another 28 year term essentially prolonging day when we are mortgage free by 5 years)…

 

But either my question is… is that how remortgaging works to release cash after the value of a property has increased or have I misinterpreted this?

Thanks in advance!

MyRealNameToo

Its in no way free, you'll be paying interest on it for 25 years (or whatever the duration of your mortgage is), by your logic getting a loan is "free money" and this is just a loan secured against property. 

Fundamentally though yes, if you take out a new mortgage for more than your current one you get the difference but its just a loan and will either increase your repayments or extend your repayment period which either way will see you pay back much more than what you borrow

sammyjammy

Its only free money if you were selling the asset and then you would have nowhere to live.

joedyer123

MyRealNameToo said:

Its in no way free, you'll be paying interest on it for 25 years (or whatever the duration of your mortgage is), by your logic getting a loan is "free money" and this is just a loan secured against property. 

Fundamentally though yes, if you take out a new mortgage for more than your current one you get the difference but its just a loan and will either increase your repayments or extend your repayment period which either way will see you pay back much more than what you borrow

Thanks for the response. Of course not free but hopefully the initial post clarifying this (ie increased monthly repayments or over a longe period of time) made sense - I was more so asking that in this situation I could essentially take out the £41k as a lump sum for example.

sammyjammy said:

It’s only free money if you were selling the asset and then you would have nowhere to live.

Thanks for the reply. As above, hopefully my “free” comment initially didn’t give off the wrong impression! 

Just to clarify however, if we weren’t to move house and stay in the same house, would we still get the (in this example) £41k as a lump sum or would we only get that if we moved and bought an entirely new property altogether given that if we are staying there’s no concrete way of knowing what the property is worth as it’s not like it was sold on the market? Thanks again.

Martico

Thw simplest way I can think to explain is that it'd be an asset that you could borrow (potentially more) money against. At market rates.

My example: I bought mortgage-free around ten years ago. If I wanted "access to" the increase in my property's value over that time (and I don't want to sell) then I'd need to borrow the money, at market rates, using my property as collateral.