Can I release equity if I still have a mortgage?

Releasing equity from your property, even when you have an existing mortgage, is a common financial strategy used by homeowners across the UK. The process involves borrowing against the value of your home, minus any outstanding debt you already owe. While it is certainly achievable, the method you choose—whether remortgaging, taking out a second charge loan, or exploring equity release—will depend heavily on your existing mortgage terms, your financial situation, age, and future plans.

Can I Release Equity If I Still Have a Mortgage? Understanding Your Options

The short answer is yes, you absolutely can release equity from your property even if you still have an outstanding mortgage secured against it. This is possible because equity is defined as the portion of your property’s value that you own outright—that is, the property’s current market value minus the total outstanding debt secured against it.

For example, if your home is valued at £300,000 and you have £100,000 left on your mortgage, you have £200,000 in equity. Lenders are often willing to lend against a percentage of this available equity, provided you meet their specific affordability criteria.

Understanding the concept of Loan-to-Value (LTV) is crucial here. LTV is the ratio between the amount you borrow and the total value of the property, expressed as a percentage. When you seek to release equity, you are essentially increasing your total LTV ratio.

How Does the Existing Mortgage Affect Equity Release?

Your current mortgage significantly influences which equity release route you can take. Lenders need to ensure that the total debt (your existing mortgage plus any new borrowing) remains manageable and that there is sufficient equity left to protect their investment.

When you release equity, you are essentially adding a new layer of debt or replacing the existing debt with a larger one. This means any new lender must first assess the security of the existing mortgage (which is typically known as the ‘first charge’).

The Three Primary Methods for Releasing Equity

Homeowners in the UK generally have three main routes available to them when seeking to convert property equity into accessible cash while still having an outstanding mortgage:

1. Remortgaging (Further Advance or Replacing the Mortgage).
2. Second Charge Secured Loans.
3. Equity Release Schemes (Lifetime Mortgages).

Option 1: Remortgaging (Replacing the First Charge)

Remortgaging is often the most straightforward and cost-effective way to release equity, provided you are not tied into expensive early repayment charges (ERCs) with your existing lender.

What is Remortgaging for Equity Release?

This process involves moving your mortgage from your current lender to a new one (or applying for a larger loan with your existing lender, known as a ‘Further Advance’). The new, larger mortgage covers the remaining balance of your old loan, plus the additional cash sum you wish to release.

For example, if you owe £100,000 and want to release £50,000, the new mortgage would be £150,000. This new loan becomes the single first charge secured against your property.

When Remortgaging is a Good Fit

• End of Current Deal: If your fixed-rate or tracker period is ending, you can switch without penalty.
• Affordability: You can clearly demonstrate affordability for the higher monthly repayments on the new, larger loan amount.
• Lower Interest Rates: If the new interest rate offered is significantly lower than your current rate, potentially offsetting the cost of the larger loan.

Drawbacks of Remortgaging

If you are locked into a fixed-rate deal, the early repayment charges (ERCs) can be substantial, sometimes amounting to thousands of pounds. These costs must be factored into the overall viability of releasing equity via this route. Furthermore, you will need to undergo a full affordability assessment for the entire new loan amount.

Option 2: Secured Second Charge Mortgages

If switching your primary mortgage is not desirable or feasible—perhaps due to high ERCs, unique circumstances, or because your current mortgage interest rate is very low—a second charge mortgage may be the ideal solution.

How a Second Charge Loan Works

A second charge loan is a separate mortgage taken out in addition to your existing primary mortgage. It is secured against your property but sits hierarchically beneath the first mortgage. If the property were ever sold (or repossessed), the first charge lender would be repaid in full before the second charge lender receives any funds.

Because the second charge lender has a lower priority claim on the property, they typically perceive a slightly higher risk, which can sometimes translate into slightly higher interest rates compared to a standard first charge remortgage.

Benefits of Using a Second Charge

• Keep Your Current Mortgage: You do not have to pay early repayment charges on your existing loan or lose a favourable low interest rate.
• Speed: Second charge mortgages can often be processed quicker than full remortgages, especially if the funds are needed urgently.
• Flexibility: They can sometimes be more flexible regarding complex income structures or specific uses of funds, such as property development or business capital.

The total borrowing (existing first charge plus the new second charge) must remain within acceptable LTV limits, typically around 80% to 85% of the property value, though this varies between lenders and market conditions.

Crucial Compliance and Risk Warning

Any secured borrowing carries inherent risks. When taking out a second charge mortgage, you are increasing the total debt secured against your home, raising your monthly financial commitments. Failure to maintain payments on either your first or second charge loan will result in serious consequences.

Your property may be at risk if repayments are not made. Consequences of default can include legal action, increased interest rates applied to the outstanding debt, additional charges and fees, and ultimately, repossession of your home to recover the outstanding balance.

Option 3: Equity Release Schemes (For Older Homeowners)

If you are aged 55 or over, and wish to release equity without the burden of ongoing monthly repayments, a lifetime mortgage—the most common form of equity release—is another option.

Lifetime Mortgages Explained

A lifetime mortgage is a loan secured against your home. Unlike traditional mortgages or secured loans, you do not typically make monthly interest payments. Instead, the interest rolls up and compounds over the life of the loan. The total debt is only repaid when the last borrower dies or moves into permanent long-term care, at which point the property is usually sold.

Impact on Existing Mortgage

If you have an outstanding residential mortgage, a condition of the lifetime mortgage provider will be that the existing mortgage must be repaid in full, typically using the funds released from the lifetime mortgage, or sometimes with personal savings. This means the lifetime mortgage becomes the only charge against the property.

While this option guarantees you retain ownership of your home (unlike a home reversion scheme), the compounding interest means the debt can grow substantially over time, significantly reducing the value of the inheritance left to beneficiaries. Independent financial advice specific to equity release is essential before proceeding.

You can find comprehensive, unbiased information about different types of equity release and lifetime mortgages on the MoneyHelper website.

Key Factors Influencing Your Eligibility

Regardless of whether you choose to remortgage or take out a second charge loan, lenders will assess several key criteria to determine how much equity you can release and under what terms.

1. Affordability and Income Assessment

The most critical factor is proving that you can afford the repayments on the increased total debt. For both remortgaging and second charge mortgages, lenders will undertake a rigorous income and expenditure assessment. They need confidence that your income is stable and sufficient to cover the mortgage and/or secured loan repayments, alongside all your other financial commitments.

• Debt-to-Income Ratio: Lenders scrutinise how much of your monthly income is consumed by debt repayments. Increasing your total borrowing reduces your available income.
• Stress Testing: Lenders often test your ability to afford repayments if interest rates were to rise significantly.

2. Property Valuation and Loan-to-Value (LTV)

The amount of equity you can release is directly linked to the current value of your property. Lenders will commission an independent valuation. Most lenders cap the maximum LTV they are willing to accept, typically between 75% and 85% for standard residential mortgages, though specialist secured lenders may offer higher limits based on individual circumstances.

The calculation is:

(Existing Mortgage Balance + Proposed New Loan Amount) / Property Value = Total LTV %

3. Credit History and Credit Score

Your credit history plays a vital role. A strong credit score and a history of timely debt repayment signal to the lender that you are a reliable borrower. While some lenders specialise in lending to those with impaired credit, better credit profiles typically unlock lower interest rates and higher borrowing potential.

Lenders will perform a credit check to view your repayment history and existing debt levels.

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4. Specific Lender Criteria and Mortgage Type

If your existing mortgage is unconventional (e.g., a buy-to-let mortgage, an interest-only mortgage, or a shared ownership scheme), the options available for releasing equity may be restricted. Always inform any potential new lender or broker about the exact nature of your current mortgage setup.

The Process of Applying for Secured Lending

Whether pursuing a remortgage or a second charge, the application process follows structured steps:

1. Initial Consultation: Speak to a mortgage broker or financial adviser to assess your needs, available equity, and the most suitable product. They will provide a detailed quote including all fees and interest rates.
2. Application Submission: You submit the formal application along with supporting documentation (proof of income, identification, etc.).
3. Valuation: The lender commissions a professional valuation of your property to confirm its market worth and thus the available equity.
4. Underwriting and Legal Due Diligence: The lender assesses all documents, checks credit files, and engages solicitors. If you are taking a second charge, the lender’s solicitor contacts your first charge lender to confirm the outstanding balance and secure their consent.
5. Completion and Funds Transfer: Once all legal requirements are met, the loan funds are transferred to your solicitor and then released to you.

Understanding Costs Involved

Releasing equity is not without cost. These fees reduce the net cash you receive:

• Arrangement/Product Fees: A charge levied by the lender for setting up the loan, often calculated as a percentage of the amount borrowed.
• Valuation Fees: Costs associated with the professional property valuation.
• Legal Fees: Fees for the solicitor managing the conveyancing and ensuring the new charge is correctly registered at HM Land Registry.
• Broker Fees: If you use an independent broker, they may charge a fee for their advice and service.

Always request a full breakdown of the Annual Percentage Rate of Charge (APRC), which encompasses the interest rate and most non-recurring fees, giving you a clearer picture of the overall cost.

People also asked

Can I get a second charge loan if my existing mortgage is interest-only?

Yes, many lenders permit second charge loans on properties secured by an interest-only first mortgage. However, the second charge lender will scrutinise the repayment strategy for the first charge to ensure it remains robust and that the combined monthly payments are affordable.

What is the maximum LTV I can reach when releasing equity?

While the theoretical maximum LTV is 100%, most responsible lenders cap combined borrowing (first and second charge) between 80% and 85%. Borrowing beyond this level is considered higher risk and is typically reserved for specialist products or specific scenarios like bridging finance, and often involves significantly higher interest rates.

Do I need permission from my first mortgage lender to take a second charge?

Although it is a separate loan, the second charge lender is legally obliged to notify and seek acknowledgement from your first charge lender. While consent is usually granted if you haven’t breached the terms of your original mortgage, this process ensures the first charge lender is aware of the additional debt secured against the property.

What if I have bad credit but significant equity?

Even with poor credit history, having substantial equity is a major positive factor, as it provides greater security for the lender. Specialist secured loan providers are often willing to consider applicants with past financial difficulties, though the interest rate offered will likely reflect the increased risk profile.

Is equity release different from a second charge mortgage?

Yes, they are fundamentally different. A second charge mortgage requires ongoing monthly repayments of capital and interest, similar to a standard mortgage. Equity release (lifetime mortgages) usually involves rolling up the interest until the property is sold upon death or entry into care, and it is specifically aimed at homeowners over the age of 55.

In summary, releasing equity while you still have a mortgage is a routine process facilitated by the UK financial market. Whether you choose to refinance the entire amount through a remortgage or add an additional layer of debt via a secured second charge loan, careful planning and professional advice are vital. You must always ensure the resulting total monthly debt is sustainable long-term to protect your valuable asset.