How much equity do I have in my house?

An old cabin with a brick chimney on the left hand side

Home equity refers to the difference between the market value of your house and how much you owe on the mortgage. In other words, it is your ownership stake in the home. 

If you own a home, it’s important to understand how much equity you have and how to calculate it. This is particularly important if you intend on mortgaging, or you intend to borrow money against your home’s value.

By increasing your equity, you can improve your finances and your chances of accessing equity release products.  

Equity release is a good option if you need some extra money and you don’t want to move house, but as with all financial products, it is advisable to speak to an independent adviser before taking any decisions about how to spend your equity or borrow against the value in your home.

Why is equity important?

The equity in your home is very important. It is normally the biggest asset in your possession and you will want to repay the mortgage on your home before you retire.

People with low equity in their home when they reach retirement age may be forced to downsize, or go on working past their preferred retirement age, in order to repay the debt.

How to calculate your home equity

In order to understand your home’s equity, you need to understand your property’s market value. Equity refers to the amount of money that you would own if you sold your house and repaid off your mortgage today. 

If, for instance, your house’s value is £600,000 and you owe £300,000 on the mortgage, your equity is 50%. It refers to the £300,000 that would be yours once the mortgage is repaid. The equity amount you have increases if your house’s market value increases. You also increase equity with each loan repayment you make. 

To find out what equity you would have if you sold your home today, you need to get a market valuation from an estate agent, and then ask your mortgage provider to give you your ‘pay out figure’. This will tell you the amount you owe if you choose to end your loan today.

If you are looking to use the value of your equity to borrow money against your home, then you will need an independent valuation completed as part of the loan application.

It is, however, advisable to know your equity before applying for a loan as it can affect your credit rating to apply and be declined. You could look into what similar houses in your neighbourhood are selling for or use one of the many home selling sites such as Zoopla and Rightmove to find your home’s current estimated value.

Alternatively, ask your local estate agent to make an estimation of your house’s worth. All these may not be as concrete as an independent valuation but they will give a rough estimate of your home’s market value. 

You may decide later on to use your equity to invest in more property depending on the circumstances.

If you invest in property using your equity, it could have tax consequences. In this case, it is recommended that you speak to your tax adviser to acquire more information before deciding on the best strategy to proceed with.

Increasing your equity

Your equity increases every time your home’s market value increases. Similarly however, your equity decreases every time your home’s value decreases.

If the house’s value remains stable, you could still build equity by lowering your loan-to-value (LTV) ratio or by paying down your loan’s outstanding debt which will happen automatically if you make your monthly payments and your loan is a repayment mortgage rather than an interest-only mortgage.

If your loan is an interest-only mortgage then the only way you can increase your equity is through a rise in property prices.

If you intend on lowering your LTV ratio quickly, try and pay more than the required minimum amount on your monthly mortgage payment. It helps to chip away at your loan balance. 

You should also keep your house well-maintained and neat to protect its value. You could also make improvements to your home to increase its value.

Always keep in mind however, that economic conditions can affect your house’s value regardless of what you do. If your house price increases, your LTV ratio will drop. In turn increasing your home’s equity. On the other hand, falling house prices can cancel out the value of any improvements you make.

Repaying your loan 

Before you start thinking about how you are going to spend your equity, you should keep in mind that market prices fluctuate. You should always consider your loan repayment amount. 

If your plan is to renovate. Consider what value the renovation will be adding to your house. You should make sure you do not overcapitalise. This is where you end up spending more on renovations than your house ends up being worth.

It is wise to consult a real estate professional or a surveyor before making any renovations that you hope will increase your home’s value, as not all renovations do achieve higher resale prices and this can be true in certain locations. There is a ‘ceiling’ price on properties meaning that no matter what you spend, you will never achieve anything over a specific resale price. 

Once you have an idea of how much equity you have and you have an idea how you would like to invest it, contact a lending specialist. They can talk to you about your situation and walk you through some options.

What is equity release?

Equity release refers to a range of products that let you access the equity tied up in your home.

They are only eligible to those over 55 years of age. You can take the money as a lump sum, in several smaller amounts or as a combination of both.

Equity release options

There are two main equity release options:

  • Lifetime Mortgage: you take a mortgage that is secured on your home provided it’s your main residence, while you still retain ownership. You can ring-fence part of your home’s value as an inheritance to your family. You could also choose to make repayments or let interest accumulate. The loan amount plus the interest accrued is paid back once you move into long-term care, or when you die.
  • Home Reversion Plan: you sell a part of your house to a home reversion provider in exchange for regular payments or a lump sum. You get the right to go on living in the house rent free until you die. However, you have to agree to insure and maintain the house. If you wish, you can ring-fence a certain percentage of the house’s value. The percentage that you choose to retain will remain the same in spite of property value changes. This is unless you choose to take further cash releases. The house ends up being sold and the sale proceedings are shared according to the remaining ownership proportions.

Equity release is a good option if you need some extra money and you don’t want to move house, but as with all financial products, it is advisable to speak to an independent adviser before taking any decisions about how to spend your equity or borrow against the value in your home. 

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