Checked by Connor Fitzgerald, Founding Director
House equity, sometimes referred to as mortgage equity or home equity, is a term that is used commonly in the financial and mortgage industries. In this article, we will cover the following frequently asked questions when it comes to equity:
Having been providing mortgage advice to the local community in and around Yeovil, Taunton and across Exeter for half a decade. In that time our experience has helped 100s of first time buyers and current homeowners get mortgages that are right for them. See our 350+ five star Google Reviews to see how our clients found the process with us, helping them to use and build up equity in their new homes.
ouse equity is the amount of your house that you own, compared to your mortgage payments. For example, if your home was worth £350,000 and you have £300,000 left to pay on your mortgage loan then you own £50,000 of your property. That £50,000 is known as house equity.
Please note, that other factors can feature when looking at house equity and how much equity is available to you, including:
Housing market status:
If the housing market was to dip and your house value was to fall, then you could have negative equity in your house.
(Negative equity is when your home has fallen below the amount you still owe on your mortgage. I.e, if your house is worth £250,000 in the market drop, but you have a £300,000 mortgage).
Deposits:
The deposit you put on a house is included in your equity amount. So if you put a 5%, 10% or more deposit down for your house, that total is also included as equity.
House value increases:
If you’ve completed major renovations, such as adding additional rooms, installing central heating (if there was previously none), creating off-road parking solutions, adding in solar panels etc.
Then if that has increased the house value, that would be considered as part of your equity. For example, if you purchased a house for £100,000 and added £50,000 worth of value to it, then that money would be your equity.
Take the value of your home (if you’re unsure what your home’s value is, you could look at what other similar houses in your area have sold for recently, contact a local estate agent or get an online valuation). Then subtract all of the mortgage repayments you’ve made (not including the interest rate) as well as your original deposit.
The figure you have left is a rough estimate of your equity value. Please note, lenders may have their own way of calculating your equity and it can be affected by external factors, such as the housing market’s status.
Using your home’s equity, otherwise known as equity release, is a way of releasing some of the value you’ve accumulated in your home, so you can enjoy tax-free cash for other things.
To apply for equity release you will need to be over a certain age, this may differ depending on your lender, you don’t need to have paid off your mortgage in full and you can stay in your home.
Alternatively, you can use your home’s equity as a deposit on your next property. This is the most common way that people make use of their home’s built-up equity. By using your equity as a deposit, you will lower the value needed for a mortgage, helping you to move up the property ladder. Read more about the property ladder in our blog post, ‘5 benefits of being on the property ladder’.
If you did want to release your equity and not use it to purchase your next property, you can do this in two ways:
Opening a lifetime mortgage allows you to use the value of your home to fund other financial commitments, such as:
A lifetime mortgage is secured on your home and is usually repaid when your property is sold. If you have an existing mortgage on your property, the money from the lifetime mortgage must be used to repay the mortgage (please note repayment fees may apply).
Home reversion is where you use the value of your home to sell a share of your property in return for a lump sum. While you’ve sold a share of your property, you can still live in your home. However, if you were to sell your property in the future, any money made from the sale would have to be split per the property ownership. I.e, if you sell 30% of your property, then they are entitled to 30% of the sale money.
Please note, that there can be various fees associated with equity release and if you need any further guidance on the matter, we recommend that you speak to a qualified mortgage advisor and think about the long-term effects it could have on your financial status.
Building equity in your home is important as not only does it decrease the amount of debt you owe your lender (mortgage debt), but it also helps to increase your economic status in assets.
Building equity in property is a common way that most homeowners increase their finances and also leverage their home equity to borrow money, at a lower rate than if they didn’t have any equity.
Homeowners with large amounts of equity can be more resilient to factors beyond their control, such as a sudden decline in housing markets and property value.
Unsure how your home equity can help you move up the property ladder or what it really means? Get in touch with our team of helpful advisors who will be able to provide you with more information relevant to you and your situation.
For more information, or to book your initial free consultation, contact our team at admin@thelevelsfinancial.co.uk or call our team on 01458 772 040.
For more information, or to find out more about equity, mortgage applications and the range of mortgages on offer, see our blog posts:
Because we always have your best interests at heart, you need to know…
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances.
The fee is up to 1%, but a typical fee is 0.3% of the amount borrowed.
