If you’re moving home, the equity in your current home could help pay for your next step. Find out how equity works, how to work out what you have, and how it could affect your move.
What is equity in a house?
Equity is the difference between what your home is worth now and how much you still owe on your mortgage.
The more equity you have, the more you could put towards your next home. It could also affect how much you need to borrow and the mortgage deals available to you.
How to work out how much equity you have
First, find out how much your home is worth today, then take away the amount you still owe on your mortgage.
To get an idea of your home’s value, you could use an online valuation tool or ask an estate agent to value it. Online estimates are a handy starting point, but an estate agent will be able to give you a more accurate figure. You can usually check out your outstanding mortgage balance through your lender.
For example, if your home is worth £300,000 and you have £180,000 left to pay on your mortgage, you have £120,000 in equity.
Keep in mind though, this doesn’t mean you’ll have £120,000 in your pocket when you sell. You’ll need to account for costs like estate agent fees and legal fees too.
What is negative equity?
Negative equity is when you owe more on your mortgage than your home is currently worth.
This can happen if house prices fall, meaning your property might sell for less than the amount you still owe. Being in negative equity can make moving home trickier, as selling your property might not raise enough to pay off your mortgage.
If you’re in this situation and thinking about moving, speak to your mortgage lender or a mortgage adviser to get help with your next steps.
Building equity
As a homeowner, there are two main ways to build equity:
Paying down your mortgage: As you make monthly mortgage payments, you’ll gradually reduce what you owe, which increases your equity. You could also consider overpaying your mortgage to reduce your balance faster, just make sure you check with your lender first to avoid any overpayment charges.
Your home increasing in value: If your home goes up in value, your equity could grow even more. This might happen because of changes in the property market, or improvements you’ve made to your home.
Some improvements, like updating a kitchen or bathroom, could add value, but remember, not every project will increase your home’s value by as much as it costs.
Don’t forget that house prices can fall as well as rise, so your equity isn’t guaranteed to increase over time.
How equity affects your mortgage options
The amount of equity you have can influence your loan-to-value (LTV) when you buy your next home. LTV is the percentage of the property’s value you need to borrow on a mortgage.
Having more equity to put towards your next purchase could mean a lower LTV, which could give you access to more competitive mortgage rates. Bear in mind that the deals available will depend on your circumstances and the lender’s criteria.
How your equity affects buying your next house
The equity you’ve built up could give you more options when it’s time to move. How much you have available can affect the deposit you put down, the home you can afford and how much you’ll need to borrow.
Using your equity as a deposit
When you sell your home, the money from the sale is used to pay off your outstanding mortgage. Whatever’s left, after selling costs, is your equity to put towards your next home.
You can use this as a deposit, which could mean you need to borrow less, and might give you access to more competitive mortgage rates.
Upsizing or downsizing
Looking to move somewhere bigger? The equity you’ve built up could help you afford a more expensive home, depending on how much you have available and how much you can borrow.
Or perhaps you’re ready to downsize. Selling your current home and buying somewhere cheaper could leave you with money left over to put towards other goals, whether that’s house renovations, travel or simply having a bit more financial breathing room.
Can you remortgage to release equity
If you want to access some of your equity without selling your home, you might be able to remortgage and borrow more against your property. You could potentially use this money towards another property, but your lender will assess your income, outgoings and affordability.
Remember, remortgaging to release equity this way means taking on more borrowing, which could increase your monthly interests too.
Making the most of your equity
The equity in your home could give you more options, but before making any big decisions, think about your future plans, what you can comfortably afford and how a move could affect your finances in the long run.
If you’re unsure on your next steps, get in touch with an adviser to find out how to make the most of the equity in your home.
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FAQs
Yes, you could use some of the equity in your home to help pay for a second property. One option is to remortgage and release some of that money to put towards a deposit. Whether you can do this will depend on your finances and your lender’s criteria.
Negative equity can make moving trickier, so it’s a good idea to speak to an adviser about your options.
This depends on how much your home is worth, what you still owe on your mortgage and what you can afford to repay. Your lender will assess your circumstance to work out how much you could borrow.
It could be useful if you need money for home improvements or want to buy another property. Remember though, you’ll be borrowing more against your home, which could mean higher repayments and more interest to pay.