Increased home value- what to do
Discussion
Hi All,
I was wondering if anyone could give me some advice/ideas.
We are due to remortgage our house next year (as fixed rate ends), however the house value has increased by around £55k since we bought it.
I would like to understand my options in terms of using this incresed equity. A number of different possibilities have come to mind including:
-Releasing equity for a deposit on a BTL (would this require a second mortgage to generate a cash lump sum? I am still unsure how this works in practise)
-Relesing equity to clear our student loans and thus give us over £700 extra cash available a month which could be saved; again, would this require a second mortgage, or can I take out cash on a remortgage i.e. if the house is worth £410,000 and we have the £70,000 we put down, plus the £55,000 increase in value, can we take out a mortgage of £305,000 to release around £30,000 cash?
- Use increased equity for a house extension/loft conversion; same questions apply to the point above
- Simply remortgage using the new amount of equity in the house aainst the current outstanding balance; are there any reasons to do this (or not do this)? Would I be wasting the oppourtunity given to me by the increased house value?
As you can see, I am pretty cluless about this stuff, and I don't really know anyone personally who has experience with these options, so any advice/thoughts are welcome!
I was wondering if anyone could give me some advice/ideas.
We are due to remortgage our house next year (as fixed rate ends), however the house value has increased by around £55k since we bought it.
I would like to understand my options in terms of using this incresed equity. A number of different possibilities have come to mind including:
-Releasing equity for a deposit on a BTL (would this require a second mortgage to generate a cash lump sum? I am still unsure how this works in practise)
-Relesing equity to clear our student loans and thus give us over £700 extra cash available a month which could be saved; again, would this require a second mortgage, or can I take out cash on a remortgage i.e. if the house is worth £410,000 and we have the £70,000 we put down, plus the £55,000 increase in value, can we take out a mortgage of £305,000 to release around £30,000 cash?
- Use increased equity for a house extension/loft conversion; same questions apply to the point above
- Simply remortgage using the new amount of equity in the house aainst the current outstanding balance; are there any reasons to do this (or not do this)? Would I be wasting the oppourtunity given to me by the increased house value?
As you can see, I am pretty cluless about this stuff, and I don't really know anyone personally who has experience with these options, so any advice/thoughts are welcome!
Edited by MattW123 on Monday 29th December 10:16
Firstly, how have you came to the assumption that the property has increased in value by £55k? By what other similar properties are listed for? By an Estate Agent? You need to look at what properties are actually selling for to ascertain any perceived increase in value, as this is what the mortgage valuer will look at, Eg if you look at houseprices.co.uk are there comparable properties sold at £55k above your property value in the last 6-12 months? When remortgaging this is what the valuer will refer to rather than Estate Agency estimates or Rightmove listings....
The rest of the questions are hard to answer without knowing the actual figures involved;
- Yes, you could release funds for a BTL. You'd need to find a prospective BTL property and take 25% of the value of that property as the amount you'd need to take out of your current property when you remortgaged. Yes, you'd need a second BTL mortgage on the BTL property.
- If the figures fit, yes you could release enough to cover your Student loans. I'm not sure I've ever seen Student Loan repayments of £700pm before, you either earn a lot or your loans are quite large, or both!
- Yes, as above, you could release the money for a loft extension.
- Yes, if you simply remortgage without taking out any funds then you will find that your new lower LTV will gain you access to lower rates than probably what you are currently on. However, if you try to borrow money for any of the above scenario's then that is going to push your LTV higher, meaning higher rates and fees.
You'd need to properly crunch the numbers to see which one is most beneficial. For example, is putting your low interest rate student loans onto your mortgage the right thing to do? If it pushes your LTV if into the higher LTV categories then you've put your WHOLE mortgage on to a higher rate, just to pay of Student Loans that are probably on low rates already.
You also need to ensure that your income & expenditure fits any potential new mortgage if you are going to increase your borrowing, in addition to lots of other criteria that needs to be taken into account.
First port of call would be to assess how accurate your new valuation figure is, as you could ponder the above for weeks, but if the valuer comes along and says your figures are pie in the sky and it's only gone up say £10k, then it will all fall out of bed quite quickly..........
The rest of the questions are hard to answer without knowing the actual figures involved;
- Yes, you could release funds for a BTL. You'd need to find a prospective BTL property and take 25% of the value of that property as the amount you'd need to take out of your current property when you remortgaged. Yes, you'd need a second BTL mortgage on the BTL property.
- If the figures fit, yes you could release enough to cover your Student loans. I'm not sure I've ever seen Student Loan repayments of £700pm before, you either earn a lot or your loans are quite large, or both!
- Yes, as above, you could release the money for a loft extension.
- Yes, if you simply remortgage without taking out any funds then you will find that your new lower LTV will gain you access to lower rates than probably what you are currently on. However, if you try to borrow money for any of the above scenario's then that is going to push your LTV higher, meaning higher rates and fees.
You'd need to properly crunch the numbers to see which one is most beneficial. For example, is putting your low interest rate student loans onto your mortgage the right thing to do? If it pushes your LTV if into the higher LTV categories then you've put your WHOLE mortgage on to a higher rate, just to pay of Student Loans that are probably on low rates already.
You also need to ensure that your income & expenditure fits any potential new mortgage if you are going to increase your borrowing, in addition to lots of other criteria that needs to be taken into account.
First port of call would be to assess how accurate your new valuation figure is, as you could ponder the above for weeks, but if the valuer comes along and says your figures are pie in the sky and it's only gone up say £10k, then it will all fall out of bed quite quickly..........
I don't know the figures, but student loans tend to have a very low interest rates, you'd need your mortgage rate to be lower than this to justify "borrowing" more money to pay them off.
Your house may have gone up £55k in theory, but this figure is fairly meaningless until you sell as you will still be borrowing money against expectation, rather than concrete reality. And don't forget that the house you want to move to in a few years will have gone up in value too.
I'm not saying what your suggesting is a bad idea, just that you need to think through the long term implications very carefully.
Your house may have gone up £55k in theory, but this figure is fairly meaningless until you sell as you will still be borrowing money against expectation, rather than concrete reality. And don't forget that the house you want to move to in a few years will have gone up in value too.
I'm not saying what your suggesting is a bad idea, just that you need to think through the long term implications very carefully.
Personally (and taking Sarnie's comments re value on board), I'd be keeping it simple and using the higher value / lower LTV to secure a lower rate, preferably fixed. You'd then have certainty regarding repayments for whatever the fixed term, allowing you to budget well in advance, plus the lower repayments could be used for other things, perhaps paying off the student debt? All very sensible trousers stuff I'm afraid, but I have that sort of attitude to finances.
Thanks for the replies All.
Sarnie, the student loan repayments are the combined amount for my wife and I and are generated by salary. We still have around £20k-£25k as I only finished uni 2 years ago.
You are right, I need to be sure about the house value; the £55k is based on the house next door selling for £40k more than ours a few months later, the zoopla index, and the price of other houses.
Each of the options contain issues I know very little about; would a lost conversion be worth the cost or is the house footprint too small for the extra bedrooms? Would a kitchen extension take too much garden? Would it add value? etc etc All the usual questions, combined with my unfamiliarity with releasing the equity itself.
Lots to think about! I think ideally I would like to get a buy to let, as I would like to have a few properties in the future. The reality of releasing equity and buying another property to rent out and manage seems quite intimidating!
Sarnie, the student loan repayments are the combined amount for my wife and I and are generated by salary. We still have around £20k-£25k as I only finished uni 2 years ago.
You are right, I need to be sure about the house value; the £55k is based on the house next door selling for £40k more than ours a few months later, the zoopla index, and the price of other houses.
Each of the options contain issues I know very little about; would a lost conversion be worth the cost or is the house footprint too small for the extra bedrooms? Would a kitchen extension take too much garden? Would it add value? etc etc All the usual questions, combined with my unfamiliarity with releasing the equity itself.
Lots to think about! I think ideally I would like to get a buy to let, as I would like to have a few properties in the future. The reality of releasing equity and buying another property to rent out and manage seems quite intimidating!
MattW123 said:
-Releasing equity for a deposit on a BTL (would this require a second mortgage to generate a cash lump sum? I am still unsure how this works in practise)
Do your sums very carefully - you would be borrowing 100% of the money to buy an investment, not the best starting point from a risk perspective.MattW123 said:
-Relesing equity to clear our student loans and thus give us over £700 extra cash available a month which could be saved; again, would this require a second mortgage, or can I take out cash on a remortgage i.e. if the house is worth £410,000 and we have the £70,000 we put down, plus the £55,000 increase in value, can we take out a mortgage of £305,000 to release around £30,000 cash?
You would still have to pay the money back you're borrowing to pay off the student loan. I presume the payments will be lower as you'll borrow over a longer term, but be very aware you'll end up paying back considerably more in total.
MattW123 said:
- Use increased equity for a house extension/loft conversion; same questions apply to the point above
Do you need one, if not, what's the point - you'll still have to pay back the extra money, so will increase your mortgage payments for something you possibly don't need.MattW123 said:
- Simply remortgage using the new amount of equity in the house aainst the current outstanding balance; are there any reasons to do this (or not do this)? Would I be wasting the oppourtunity given to me by the increased house value?
This is what you should do. Everyone's house goes up in value over time. If you take extra borrowings out every time you remortgage you'll never pay off your original loan. Also make sure that you reduce the term of the mortgage in line with the unexpired term of the current mortgage. Again, if you take a 25 year term for each remortgage you'll never pay back the loan.If there is something you genuinely want to invest in then remortgaging is a good way of borrowing money, but is not something to be done just for the sake of it.
Edited by JQ on Monday 29th December 17:03
Student loan is usually the cheapest money you can borrow, so it's unlikely to be worth borrowing on a mortgage to pay it off.
£700 per month is a hell of a lot though!
Although borrowing money to pay off a debt to save money seems a bit counter intuitive!
£700 per month is a hell of a lot though!
Although borrowing money to pay off a debt to save money seems a bit counter intuitive!
Edited by blank on Monday 29th December 19:24
lukefreeman said:
That's a massive student loan! 9% post £1400 a month to make £700 is powerfully built director salary
Have a play around on here. You only have to be on around £110k a year to see £700ish come out of your take home monthly salary. http://www.thesalarycalculator.co.uk/salary.php
Sarnie said:
Ha!
£110k two years after University is going some!
PS: The £700pm is between the OP and his partner............
The point is, over £700 a month is a fair whack... but it doesn't seem like a smart idea to use the mortgage to clear this. It will be a good month when it is cleared! And yeah, that is between myself and the wifeypoos. £110k two years after University is going some!
PS: The £700pm is between the OP and his partner............
MattW123 said:
The point is, over £700 a month is a fair whack... but it doesn't seem like a smart idea to use the mortgage to clear this. It will be a good month when it is cleared! And yeah, that is between myself and the wifeypoos.
£700pm IS a fair whack but it's cheap money and moving it elsewhere is likely to cost you more over the term....Also, if you were out of work or had to take a salary cut, the student loan would drop accordingly......
MattW123 said:
The point is, over £700 a month is a fair whack... but it doesn't seem like a smart idea to use the mortgage to clear this. It will be a good month when it is cleared! And yeah, that is between myself and the wifeypoos.
You mentioned having a contract on a M5 worth over 75k in a previous post, have you still got this as that payment must be up near what you are paying for your student loan. I know it's PH but seems a very expensive outlay if you are wanting to pay off your loan and look at getting onto buy to let in some possible equity that has built up on your house.
lukefreeman said:
What's lower interest, mortgage or loan?
I'd pay the higher one off. Besides, the more capital you know off house, the more equity you own. Don't get that with student loan.
But that would only form part of the OP's calculation as he's comparing loans of different terms. A 23 year mortgage of £30,000 at 2.0% would cost approximately 400% more than a loan of 3 years at 4.0%.I'd pay the higher one off. Besides, the more capital you know off house, the more equity you own. Don't get that with student loan.
The above interest rates are completely made up, as I have no idea what rate the OP can borrow at, I just wanted to highlight that its the total cost of borrowing that needs to be compared, not interest rates when comparing loans of different terms.
The OP would have to be getting an amazing mortgage rate to warrant paying off the student loan with a mortgage.
OP - you might want to consider an offset mortgage. That would allow you to draw out capital now, but leave it in the offset account thereby not adversely impacting your mortgage costs but giving you the flexibility to access the money at a future date. However, mortgage borrowing really is only for long term investments as it's an expensive method of borrowing due to the long term nature, ie. do not buy a car with the cash. Also don't forget that if you do draw any cash out you'll need to increase your mortgage payments to keep the unexpired term the same. If you don't you may find you've increased the term of your mortgage by several years and increased the cost by thousands of pounds. And as mentioned above by others, by doing the above you may get a worse interest rate as your LTV will be worse.
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