When you’re looking to move home, you may hear the term ‘equity’ frequently. But what is equity and why and how should you try to get more equity in your home.
What is equity?
Equity is the portion of your property that is owned without debt. Following your property purchase, this could be the amount you paid as a deposit. Over time, if your mortgage is a repayment one, your mortgage payments will increase your equity.
Example:
| Your home is worth | £250,000 |
| Outstanding mortgage amount | £200,000 |
| Equity in property | £50,000 |
This is a 20% equity in the property
Why should you try to build equity in your property?
There are a number of reasons why it is beneficial to build equity in your property. If you may look to purchase a more expensive property in the future, the more equity you have in your current home, the better. It will mean the amount you need to borrow as a mortgage is lower. Your loan-to-value ratio will be more favourable for you, meaning better mortgage rates could be available to you.
If you’re unlikely to move in future, greater equity can still be beneficial. If you remortgage and release equity from your property, it can be used to invest elsewhere. You may take a dream holiday, pay for a child’s university tuition or even a wedding!
How can you build equity in your home?
The two ways to build equity are to increase the value of your home, or to reduce the amount owed on your mortgage.
Example 1 – Increase the value of your home
| Your home is worth | £200,000 | £250,000 |
| Outstanding mortgage amount | £150,000 | £150,000 |
| Equity in property | £50,000 | £100,000 |
| Equity percentage | 25% | 40% |
Example 2 – Reduce the amount owed on your mortgage
| Your home is worth | £200,000 | £200,000 |
| Outstanding mortgage amount | £150,000 | £125,000 |
| Equity in property | £50,000 | £75,000 |
| Equity percentage | 25% | 37.5% |
Increase the value of your home
There are a number of things you can do to increase the value of your property. Improving the EPC rating of your property could not only help you save on your energy bills, as well as increase the property’s value. This could include energy efficient heating and double-glazed windows. Green and sustainable energy features including solar panels and EV chargepoints will also increase the value.
Before costly renovations are undertaken, and if the reason is solely to increase your property value, it is worth calculating the cost of the work compared to the value added. Bathroom and kitchen upgrades can make a significant difference. Smaller-scale improvement such as a deep clean or re-sealing tiles can be a more cost-effective solution.
Reducing the amount owed as mortgage debt
You are able to reduce the amount owed on your mortgage by making overpayments. This may be through lump sum overpayments or by increasing your monthly payment amount. It should be noted that your mortgage provider will likely have a limit on how much can be overpaid in a year. Penalties may be applied if this amount is exceeded.
What is negative equity?
Should house prices fall, you may find yourself in a position of negative equity. This is where the amount owed on your mortgage is more than the property value. Should you find yourself in this position, contact us to see how we can help you.
How can Bell Mortgage Solutions help
Looking to remortgage to release equity from your home? We can help! We’ll help you find the best mortgage deal for your requirements.
Please note: Your home may be repossessed if you do not keep up repayments on your mortgage.
The information contained within was correct at the time of publication but is subject to change.
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