Remortgage to Raise Capital

What Does Raising Capital Through Remortgaging Mean?

Raising capital through remortgaging simply means replacing your existing mortgage with a new, larger one and taking the difference as a cash lump sum. The additional amount you borrow is secured against your property, just like the rest of your mortgage.

For example, if your current mortgage balance is £180,000 and your property is worth £350,000, you might remortgage to a new deal of £250,000. After paying off your existing mortgage, you would receive £70,000 in capital, which you can use as you see fit.

This approach is popular because mortgage interest rates are typically much lower than rates on personal loans, credit cards, or other forms of unsecured borrowing. For homeowners who need to access a significant sum of money, remortgaging often represents the most cost-effective option.

However, it is important to remember that you are securing the additional borrowing against your home. If your financial circumstances change and you cannot maintain the repayments, your property could ultimately be at risk. This is why careful planning, realistic budgeting, and professional advice are essential before proceeding.

The term "raising capital" is sometimes used interchangeably with "releasing equity," though raising capital can imply a broader range of purposes, including business investment and property purchases, rather than just personal spending.

Acceptable Purposes for Raising Capital

Lenders will typically ask why you want to raise additional capital as part of the application process. While most purposes are acceptable, some are viewed more favourably than others.

Commonly accepted purposes:

• Home improvements and renovations — viewed very favourably as they can increase the property's value and the lender's security
• Debt consolidation — rolling multiple debts into your mortgage is widely accepted, though lenders will want to see that the consolidation genuinely improves your financial position
• Helping family members — particularly gifting deposits to children for property purchases
• Education costs — funding university fees, school fees, or professional training
• Major purchases — vehicles, weddings, or other significant one-off expenses

Purposes that may require specialist lenders:

• Business investment — some mainstream lenders are cautious about capital raised for business purposes, as the risk profile is different. Specialist or commercial lenders may be more appropriate
• Property investment — using capital to purchase buy-to-let or investment property is accepted by many lenders, but some have restrictions on this use
• Overseas purchases — buying property or investing abroad can be more complex and fewer lenders will accommodate this purpose

Being transparent about the intended use of funds is essential. Providing inaccurate information about the purpose of borrowing could be considered mortgage fraud, which carries serious legal consequences. A mortgage adviser can help you find lenders who are comfortable with your specific purpose.

How the Capital Raising Process Works

The process of remortgaging to raise capital follows the same fundamental steps as a standard remortgage, with additional attention paid to the purpose and amount of the capital being raised.

Initial assessment: You or your mortgage adviser will review your current mortgage terms, property value, and financial situation. This establishes how much capital you could potentially raise and whether remortgaging is the right route.

Product selection: Your adviser will search the market for remortgage deals that accommodate capital raising and offer competitive terms for your circumstances. Key factors include the interest rate, fees, LTV limits, and any restrictions on the use of funds.

Valuation: Your lender will arrange a valuation of your property to confirm its current market value. This determines your LTV ratio and therefore how much you can borrow. Many remortgage products include a free valuation.

Application and underwriting: You will submit a full mortgage application with proof of income, bank statements, identification, and details of your existing commitments. The lender's underwriters will assess your affordability and verify the information provided.

Legal work: A solicitor or conveyancer handles the legal transfer from your old mortgage to the new one. They will check the property title, carry out standard searches, and prepare the necessary documentation. Free legal work is included with many remortgage products.

Completion: Once everything is in order, your new mortgage replaces the old one. The capital you are raising is typically paid into your bank account on completion or within a few working days afterwards.

The entire process usually takes between four and eight weeks, though this can vary depending on the complexity of your application and how quickly all parties respond. If you need the funds by a specific date, make your adviser aware of the deadline from the outset.

Costs of Raising Capital Through Remortgaging

Understanding the full cost of raising capital is essential for making an informed decision. The headline interest rate is only part of the picture.

Interest costs: The additional borrowing will attract interest over the full remaining term of your mortgage. For example, borrowing an extra £50,000 at 4.5% over 20 years would cost approximately £25,800 in interest alone. This is significantly more than the same sum on a five-year personal loan, even at a higher interest rate, because of the extended repayment period.

Arrangement fees: Many competitive mortgage products carry arrangement fees ranging from £500 to over £1,500. These can usually be added to the mortgage balance, though doing so increases the total cost over time.

Early repayment charges: If your current mortgage deal has not yet expired, you may face an ERC for leaving early. These can range from 1% to 5% of the outstanding balance and can sometimes amount to several thousand pounds. In some cases, the ERC alone can make remortgaging uneconomical, and waiting until your deal ends may be the better approach.

Valuation and legal fees: Many remortgage products include free valuation and free legal work. Where these are not included, valuation fees typically range from £150 to £1,500 depending on the property value, and legal fees usually run from £300 to £1,000.

Broker fees: Some mortgage advisers charge a fee for their services, typically between £300 and £500, though many receive their remuneration from the lender through commission and do not charge the borrower directly.

When comparing the cost of remortgaging against alternatives like personal loans or secured loans, it is important to look at the total cost of borrowing over the full repayment period, not just the monthly payment. Your adviser can present these comparisons clearly to help you choose the most cost-effective option.

Key Considerations Before Raising Capital

Before committing to a remortgage to raise capital, there are several important factors to think through carefully.

Your current mortgage deal: If you are still within a fixed-rate or discounted period, check the early repayment charges. It may be worth waiting until your deal ends to avoid these costs, unless the need for capital is urgent.

Impact on monthly payments: Borrowing more means paying more each month. Use a mortgage calculator or ask your adviser to model the payment increase so you can assess whether it fits comfortably within your budget. Remember to factor in potential interest rate rises when budgeting.

Mortgage term implications: Some homeowners extend their mortgage term when raising capital to keep monthly payments manageable. While this reduces the monthly cost, it increases the total amount of interest paid and could mean you are still making mortgage payments well into retirement.

Return on investment: If you are raising capital for home improvements or business investment, consider the potential return. Home improvements that add value to your property can be a sound financial decision. Business investment carries its own risks and rewards that need separate assessment.

Alternative sources of funding: Is remortgaging genuinely the best option, or would a personal loan, further advance, secured loan, or other approach be more suitable? Each option has different costs, risks and implications.

Long-term plans: Consider how raising capital now affects your future financial flexibility. Increasing your LTV reduces the equity available for future needs, and higher monthly payments reduce your disposable income.

Professional advice: Given the significance of the decision, speaking with an FCA-regulated mortgage adviser is strongly recommended. They can objectively assess your situation, search the whole market for suitable products, and ensure you understand all the implications before proceeding.

Alternatives to Remortgaging for Raising Capital

Depending on your circumstances, remortgaging may not be the most efficient way to raise capital. Here are the main alternatives worth considering.

Further advance: Your existing lender may allow you to borrow additional funds on top of your current mortgage. This avoids the need for a full remortgage and can be arranged more quickly. However, the interest rate may be higher than you could achieve by switching to a new lender, so it is worth comparing the overall cost.

Second charge mortgage: Also known as a secured loan, this sits behind your existing mortgage. It is particularly useful if you have a competitive rate on your current deal that you do not want to lose, or if ERCs make remortgaging expensive. Interest rates are higher than first charge mortgages, but the total cost may be lower when you factor in the ERCs you would otherwise pay.

Personal loan: For amounts up to approximately £25,000, an unsecured personal loan can be a good option. The interest rate will be higher than a mortgage rate, but the loan is typically repaid over three to seven years, meaning the total interest cost may be lower. Your home is not at risk with an unsecured loan.

Bridging finance: If you need funds quickly for a short-term purpose, such as purchasing a property at auction, a bridging loan can provide fast access to capital. These are short-term products with higher rates and fees, intended to be repaid within months rather than years.

Business finance: If you are raising capital for business purposes, dedicated business loans, overdraft facilities, or invoice finance may offer better terms than borrowing against your home. Keeping business and personal finances separate is generally advisable.

Savings or investments: If you have savings, ISAs, or other investments, using these may be more cost-effective than borrowing. However, consider the opportunity cost of liquidating investments and ensure you maintain an adequate emergency fund.

A thorough comparison of all available options is the best way to ensure you choose the most cost-effective and appropriate route for your needs. Your mortgage adviser can help you evaluate each alternative in the context of your specific situation.