What is equity on a house – and how can I use it?

Let’s start at the beginning. What exactly is equity?

Equity is how much of a property a homeowner owns outright. Let’s say you have £200,000 to pay off on your mortgage and the market value of your house is £300,000. This means the equity is £100,000. As the mortgage is paid off, the equity in your home increases. So, by the time your mortgage payments have been repaid, you’ll have 100 per cent equity.

What can I use the equity in my property for?

Firstly, you can use it as a deposit when you buy a new property. If you bought a house for £200,000 and sell it for £300,000, you now have £100,000 in equity to help you secure your next home. If the house you’re buying is £400,000 you’d only have to apply for a mortgage with a 75 per cent loan-to-value (LTV) rate.

Is that good?

Yes. The lower the LTV, the better the mortgage deal you’ll be able to get. This is great if you’re looking at moving to a more expensive property because lenders will be willing to offer you more attractive terms. This means you could be eligible for the best deals and monthly payments available on the market.

Does having equity in a property help with remortgaging, too?

It does. People remortgage for two main reasons. The first is to save money by getting a better mortgage deal and reducing monthly payments – something that we can help you with. The second is to release money, which could be used for many things including to pay for home improvements or to help family members who need cash to buy a property of their own. This will depend on how much equity you have in the property and as long as you are not in negative equity.

How does that work?

Let’s say you have £250,000 of equity in a £500,000 house. That means you can take out a new mortgage with a loan-to-value rate of 50 per cent. However, your equity also enables you to borrow more money because the loan is guaranteed by the property value. So, you could get a new mortgage of £325,000 (an LTV of 65 per cent) and give yourself an extra £75,000 to spend on that house extension you’ve always wanted, for example, as well as still having £175,000 equity in the property – although just remember, as your LTV increases due to taking more equity out, it’s likely that your mortgage will have a higher interest rate meaning you will be paying more in monthly payments.

Are there other ways of increasing the equity in my property?

The simplest way is to pay more of your mortgage off in a lump sum or you could shorten the term of the mortgage, so you’re paying off more every month – although be mindful of the fact that you may be subject to an Early Repayment Charge if your lump sum exceeds the yearly allowance in your mortgage agreement. If you’re a Charles Cameron & Associates client, we’ll be able to advise you on the best approach. Also, home improvements can increase the value of your property but be aware, some works may not recoup their costs. If increasing equity is your only goal, a quick internet search will show which improvements represent the best value.

Can I get advice on how to use the equity in my property?

As an independent broker, Charles Cameron & Associates will be able to give financial advice on whether you can use your equity to get a better mortgage or remortgage deal. In addition, as we now offer a Virtual Mortgage Advice service, we can do the whole thing securely over the internet – no matter where you live.

Get in touch to find out more…