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How to calculate if releasing equity from your home is worth it?

For some, releasing equity from our home sounds like a daunting prospect, but that’s generally because of a lack of financial education and, of course, because we’re all told from such an early age to pay down our mortgage; it’s our greatest asset, right?

Wrong, Our home is not our greatest asset; it’s dead money; it’s money that could be working for us by creating more money through wise investment. Not sitting locked away in our home waiting for us to die so our children can use it.

By releasing equity in our home, we can begin to build something measurable for ourselves or our Children; we’re still going to pay this mortgage off, remember, but this way, by releasing the equity locked away in our home, we have the opportunity to purchase CASH GENERATING assets with that capital.

So, If you are considering remortgaging your property to release its equity to put to good use, Then you’ll need to know how to calculate this to see if it’s a viable option, and that’s where we come in.

So before we get into this, we need to point out the obvious, we ARE NOT FINANCIAL ADVISORS & THIS IS NOT FINANCIAL ADVICE.

You should always seek professional advice and carry out thorough due diligence before you act. 

That said, we can show you EXACTLY what it is you need to do, in order to work out whether equity release is something that you should consider.

This is How to calculate equity release …

If were to calculate this properly, we need information from various sources.

      1. We need to speak with our current mortgage provider
      2. We need to speak with a local estate agent and check out some information online, principally Zoopla.
      3. We need to speak with a mortgage broker

    Okay, So firstly we need some answers regarding our current mortgage.

    1. How much do you currently owe on your mortgage? including the original mortgage application fees
    2. Is there an early redemption charge? Now, the reason we need to know this is that if there is a £1000 or £2000 Early redemption charge (ERC), but were releasing hundreds of thousands of pounds, then it may be that we deem this charge surmountable. However, if we’re releasing £40-50,000 and the ERC is £5,000, then we might have a different view.
    3. With the previous point in mind, when does your current fixed rate end? If that’s in 3 or 4-years time and our ERC is only, say £2,000, then we may look at using this money despite that charge. Conversely, if it ends in 3-4 months then we may wait this out to save the ERC. This naturally leads us to, What is the full redemption figure? if you were to redeem the mortgage today? This will change by the time you press the trigger with this, but it will be minimal and having this figure now is key to our forward calculations.
    4. What is your current mortgage rate? This is more for comparison than anything else, but just like everything we teach at WiseOwl, it’s better to have ALL the information and not need it than it is the opposite.
    5. What are your current mortgage payments? This will be used to calculate the deficit between the old and the new payments to see how much our equity release needs to earn us to at least break even. Breaking even isn’t the point of this, by the way. but at least this would be a starting point, and we’d be able to make a decision based on that.

      Ok, so now we need information from an Agent and, quite possibly, Zoopla.

      We need to contact our local Estate Agent for an estimate, and we can corroborate this by heading across to the Zoopla website, adding in our postcode, selecting our property from the list and checking their current valuation. We need to take note of the confidence rating underneath this valuation.

      Side note on this: Zoopla’s High Confidence is very, very Good and can be used widely across your property searches and valuations; the medium is OKAY and Low confidence should be taken with a bowl of salt.

      Essentially, we need to know how much our property is worth in today’s market. simply we need to get our house valued.

      Now the final bunch of questions are for your Mortgage Broker, and if anyone is looking for help with this, drop us an email or FB message, and we can put you in touch with an excellent broker who will be able to assist with this.

      1.What is your mortgage eligibility? This is generally based on your earnings.

        We need to know what the maximum loan we’d be able to obtain from a lender. Now the word MAXIMUM might scare you a little, but remember, we can mitigate fear through education, but also, remember, we might not necessarily leverage the full amount here. Again, though, it’s better to have all of the information at this point.

        2. What’s the best mortgage rate available to you, and what’s the length of the fixed term of that mortgage? The latter is more important when looking to lock in favourable mortgage rates.

        3. What would your new mortgage payments be? Based on the higher loan amount from your property?

        Now, once you have all this information, your job is easy we simply need to pull all the information together and calculate whether equity release is the best option for us.

        So how do we use all of the information obtained?

        Well, just like our information-gathering process, we do this in stages.

        We need to calculate how much equity you can release by taking the full redemption figure for your current mortgage away from the new loan amount.

        Let’s say that the redemption figure from your current mortgage was £240,000, and the new loan amount was £370,000 (based on a 90% loan to value and our property being valued at around 410k). This means our equity release in this instance is £130

        • Calculate the difference in our mortgage payments, so that’s taking the old payments on our existing mortgage away from what the new payments would be should we press the trigger.

        So, let’s assume (and these figures are semi-made up, by the way), that our existing monthly mortgage payments are £540, but the new payments would be £1200. We simply take £540 away from £1200, leaving a deficit of £660 of increased mortgage payments each month. Now hold that thought before you run for the hills.

        • Next we need to do is to calculate what we’d be able to achieve with this equity release in terms of property purchases and subsequent cashflow.

        Download Our Equity Release Calculator Tool

        Download our equity release calculator and determine how much equity you can release and the profit to be made!

        A VERY basic example would be this: We have £130,000 to spend.

        We’d be able to buy, conservatively, 2 or 3 turnkey single-let properties and an up-and-running HMO. These would give us a gross monthly cashflow of, say, around £1800 from that figure, we take away the deficit between the two mortgage payments. So that’s £1800 in rent minus the £660 deficit, which leaves us with just over £1100 each month of profit.

        OR, and this is where it gets very interesting, we simply use this £1800 rent to pay our full mortgage. Therefore £1800 minus our new mortgage payments of £1200 leaves us with £600 cashflow every single month, now that’s over £7,000 per year and CONGRATULATIONS are in order because you’ve just achieved exactly what you’ve been working towards for years and presumably you were still a long way from achieving because effectively now…. You’re now mortgage free.

        By releasing the equity in your home and buying cash-generating assets, these are now paying your FULL mortgage down for you, and they are leaving you with a tidy profit to boot.

        Interesting right? But remember, the point of ‘Equity Release’ is not to pay your mortgage down, it is to grow your property business. We simply inputted that example for comfort and to offer a consideration you may not have thought of.

        okay, so the LAST thing you need to calculate is If the figure that’s left, either in full, by paying the deficit between your two mortgage payments or the ENTIRE mortgage for you, is measurable enough and if you feel it’s going to help your journey in the right way.

        Then you’ll have the answer you seek. Or at least you have the right information needed to help with your decisions.

        All that’s left for you to do now is to block out all the noise from outside influence, educate your partner (if you have a joint mortgage) and pull the trigger to get this going.

        Remember to consider this carefully and always seek professional advice before committing.

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