For homeowners their property is usually their most valuable asset and with rising house prices capital can accumulate over time giving them an opportunity for capital raising.
Capital raising is particularly beneficial to older homeowners as they are most likely to have seen a rise in the value of their home, unlike first time buyers that start with small deposits and have little equity.
If you bought your home ten years ago and live in southern England it is likely the value has risen considerably. You may have over 50% equity with the balance as a mortgage to a lender.
With independent advice from London City Mortgages we can help you raise capital from your home which you can use for many different purposes. We can help you find the best remortgage deal and make the online application process easy for you.
What is capital raising?
There are many reasons why you would want to raise capital from your home which could include renovating your home or buying another property.
| Reasons for raising capital from your home |
|---|
| Adding an extension to your home |
| Home improvements |
| New kitchen or bathroom |
| Deposit for a buy-to-let property |
| Paying off debts |
| Buying a parking space |
| Let-to-buy a new home |
| Divorce settlement |
If you have a financial problem, raising capital from a mortgage can be a cost effective option in the short term as interest rates are low compared to the cost of an unsecured loan.
You may already have a mortgage with time left on a preferential rate and high penalties to change the arrangement. To release capital you would secure an advance from your existing lender which is an additional mortgage running alongside your main mortgage.
By leaving this until your mortgage deal ends, as a remortgage buyer you can select a new lender and at the same time raise the capital you need so you only have one mortgage arranged with a low interest fixed or tracker deal.
Existing lender further advance
If you have time remaining on your preferential rate you would pay a penalty to remortgage so you can consider a further advance from your existing lender.
The advance would be a new mortgage typically with a different rate to your existing mortgage and is worth considering if the rates are competitive.
You can spread the mortgage payments over a longer term with competitive interest rates so the payments would be lower than an unsecured personal loans or credit cards.
Your lender would need to apply for the mortgage and this would include the standard affordability checks to meet their lending criteria.
At the end of the process you would have two mortgages and the only way to merge these in the future would be to remortgage to another lender.
Lenders and their requirements
Lenders will treat capital raising like any other mortgage and will do affordability checks to ensure you can afford the repayments. This will include stress testing to ensure you can still afford the mortgage if interest rates rise in the future.
You will need a good credit record which you can check before consider capital raising through the credit agencies Experian or Equifax.
There will be a minimum amount you can borrow such as £20,000 and a maximum amount based on the loan to value (LTV) such as 90% of the value of the property although these figures will vary from each lender.
If you are a buy-to-let investor or need a let-to-buy mortgage the lender would require you to have a 25% deposit on the value of the property and the 75% balance can be an interest only mortgage.
The level of the rental income depends on the size of the deposit and is typically 145% of the monthly payment at a notional rate, such as 5.5% interest even if the interest you pay is much less than this figure.
For example, if you buy a property for £200,000 you would need a deposit of £50,000. With the mortgage of £150,000 the lender would need a rental income of no less than 5.5% times 145% or £11,962 per year or £997 per month.
Capital raising for older homeowners
Age can limit your ability to raise capital using a mortgage as for many mainstream lenders this is restricted to age 75 although a smaller number do offer a maximum lending age of up to 85.
This means the mortgage must be repaid by the time you reach the age limit and if the term is short the repayments you make will be high.
If you are older many lenders would also need to know about your pension income to ensure you can afford the repayments to the end of the term and this would restrict the amount you can borrow.
An alternative to the traditional borrowing is a lifetime mortgage and this is available to anyone over the age of 55 although many homeowners are between 65 and 75 years of age.
This is also known as equity release and allows you to access the value in your home without the need of affordability checks which can benefit people with small incomes in retirement.
You have a choice to pay interest off each year or let the interest roll-up over time which would mean compound interest rate and a rapid build-up of debt.
Even so equity release can be attractive to release capital which can be used for any purpose including gifting to children and grandchildren.