What Is Home Equity?
Equity is the amount of a property’s value that belongs to you, free from any debt or mortgage.
Equity is the amount of a property’s value that belongs to you, free from any debt or mortgage. Essentially, it’s your stake in the home. It’s important to note that when you first buy a house, your equity is usually low because you’ll have a large mortgage balance. However, as you pay down the mortgage or if the market value of the home rises, your equity increases.
To put it simply, equity is calculated by subtracting your mortgage balance from your home’s current market value. For example, if your home is worth £250,000 and you owe £150,000 on your mortgage, your equity would be £100,000.
How Can You Increase Equity in Your Home?
There are a few different ways to increase the equity in your property:
- Pay Down Your Mortgage As you make regular mortgage payments, a portion of each payment goes toward reducing the principal balance of your mortgage if you are on a repayment mortgage. Over time, this helps to build equity in your home. The more you pay off, the larger your equity grows.
- Increase Your Home’s Value If your home increases in value, your equity will increase as well. This can happen in a few ways:
- Market Conditions: If property prices in your area rise due to a booming market or growing demand, your home’s value could increase, and so will your equity.
- Home Improvements: Renovating your home can also increase its value. Updating the kitchen, adding an extension, or improving the kurb appeal of your home can all contribute to higher property values and, in turn, increased equity.
Improve your Kerb Appeal
Benefits of Raising Equity
Building equity in your home comes with several financial benefits. Here are a few of the most significant advantages:
- Access to Funds As your equity increases, you may be able to tap into it by using a home equity loan or line of credit. This can be useful for funding home improvements, consolidating debt, or even making investments. By borrowing against your equity, you can access a substantial sum of money without needing to sell your home.
- Profit When Selling If you decide to sell your home, having built up equity can mean making a profit. If your property is worth more than the remaining mortgage balance, the difference is yours to keep. This profit can be used as a deposit for your next property or for other financial goals.
- Improved Re-mortgage options If you’re looking to remortgage, having more equity in your property could open the door to more options for you such as lower interest rates. This can result in smaller monthly payments and reduced overall borrowing costs.
Equity and Your Future Property Purchase
Equity plays a crucial role in determining your future property purchase. It affects how much you can borrow, what kind of mortgage rates you can secure, and even whether you can afford a larger or more expensive property. Here’s how equity may impact your next move:
- Upgrade to a Larger Home If you’ve built up enough equity, you may be able to use it as a deposit for a larger home. This could allow you to move into a more desirable area or get a property with more space or better features. Essentially, the more equity you have, the more flexibility you have in your property journey.
- Downsize for Financial Flexibility On the other hand, if you’re considering downsizing, the equity in your current home can provide you with extra cash to put towards other financial goals. For instance, if you sell your current home and buy a smaller one, you may be able to walk away with a lump sum that can be used for things like retirement savings, travel, or investments.
Utilising Your Equity for Future Purchases
Understanding how your home’s equity works is critical for making smart financial decisions in the future. Whether you’re looking to upgrade to a new home or tap into the funds for renovations, the equity in your property is an asset that can help you achieve your goals.
If you’re interested in learning more about how to increase your equity or how to use it for your next property purchase, get in touch with one of our mortgage experts. We can help you explore your options and ensure you’re making the right financial choices for your future.
**You may have to pay an early repayment charge to your existing lender if you remortgage.
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for arranging a mortgage. The actual amount you pay will depend on your circumstances. The fee is up to 1.5% but a typical fee is 0.3% of the amount borrowed.
