What is home equity and how can I use it?

Ever wondered how much equity you have in your property? Here’s our complete guide to home equity – and what you can do with it.

Ever wondered how much equity you have in your property? Here’s our complete guide to home equity – and what you can do with it.

Daniel Evans
Mortgages expert
4
minute read
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Posted 5 AUGUST 2022

What is home equity?

When people talk about equity, they’re talking about how much of your property you actually own.  
To work out how much equity you have in your home, simply subtract your mortgage from the amount your property is worth. So, if your home is worth £250,000 and you have a £100,000 mortgage, your equity is £150,000.

How does home equity change over time?

The amount of equity you have can increase as your home goes up in value or you pay off more of your mortgage. For example, if have a £250,000 mortgage on a home valued at £400,000, you’ll have 38% equity in your home. If the value of your home goes up to £500,000, you’ll have 50% equity.

But if your home decreases in value or you decide to borrow against your mortgage, your equity could go down. If property values fall to the extent that you end up owing more on your mortgage than your home is worth, this is called being in ‘negative equity’.

How to build home equity

In a rising market, your equity will increase automatically, without you having to do very much. However, there are a few ways to build your equity. For example, you can:

  • Pay a larger deposit
    The bigger your deposit when you take out your mortgage, the more of your property you’ll own.
  • Take out a repayment mortgage
    Having a repayment, rather than an interest-only, mortgage, means you’ll be chipping away at the sum you originally borrowed as well as the interest. In time, this will give you more equity in the property as well as lower mortgage repayments.
  • Overpay your mortgage
    If you find yourself on the receiving end of a salary increase or an unexpected windfall, you could use it to overpay your mortgage. This will reduce your monthly repayments and mean you build more equity in your home. Before you do this, however, you need to check how much you’re allowed to overpay each month or over a year and whether there are any early repayment charges.
  • Renovate your home
    It could be worth investing in a new kitchen, bathroom or even a loft conversion or extension, as these kind of home improvements could increase the value of your property.

How to use home equity

It’s always useful to know how much equity you have in your property, as you could use it to improve your lifestyle. If you have a lot of equity in your home, you can use it to:

Remortgage
If your current deal is coming to an end, you could remortgage to gain access to some of the equity in your home.

Take out a loan
Many lenders offer homeowner loans, which let you borrow against the equity or value of your home. You can use this money to renovate, which will in turn increase your home’s value – and your equity. However, you need to think very carefully because the debt will be secured against your property and your home may be repossessed if you do not keep up the repayments.

Equity release
If you’re over 55 and need access to funds without selling your home, you might want to consider equity release

What is equity release?

Equity release, sometimes known as a lifetime mortgage, gives homeowners over 55 a way to generate income without having to sell their home.
How much you can release will depend on your age and how much your home is worth, but you can use the money how you want – whether that’s to help your children onto the property ladder or travel the world.

Benefits of equity release:

  • You get to stay in your own home
  • There are no monthly payments to make
  • You may be able to access low interest rates
  • You can give your family a cash gift without paying inheritance tax.

Downsides to equity release
As with anything, equity release has downsides that you’ll need to be aware of, including:

  • Interest could build up quickly, increasing your debt
  • Your estate will be affected, so you’ll have less to leave to your loved ones when you die
  • It might affect any benefits you receive.

If you’re considering equity release, it’s worth seeking professional advice.

How much equity can I release on my home?

Interested in equity release? Use our handy calculator to find out how much you could access.

Considering an equity release mortgage?

Find out more

Frequently asked questions

How do I find out how much my property is worth?

You can book a free valuation with your local estate agent. It’s worth seeking a few opinions.

Alternatively, you could check property websites, such as Rightmove, to see how much homes in your area are selling for. Be sure to check the sold prices, rather than the asking prices, so you get a better idea of how much properties are actually going for.

What should I do if I’m in negative equity?

If you’re in negative equity, it could be that you’re better off simply sitting it out and waiting for house prices to rise again. You could also consider overpaying your mortgage to reduce your debt.

What’s an alternative to a home equity loan?

One alternative to a home equity loan is to remortgage – to increase your mortgage borrowing and take the money as cash. Any loan like this will be secured against your home, so always make sure you can afford the repayments before you enter into this kind of loan agreement.

How does my deposit affect my equity?

The bigger the deposit you put down when you buy a property, the more equity you’ll have. This is because you’ll own a greater portion of the property.