If you are considering purchasing a new home or are already a homeowner, the term ‘home equity’ may be familiar. You may have spoken with an estate agent or mortgage lender, and home equity will have come up in the conversation.
However, there is quite a bit of confusion surrounding the meaning of home equity. How is it calculated, and why is it important are two common questions people ask.
This article seeks to answer these questions, as well as a few more regarding home equity.
What is Home Equity?
The difference between the value of your home and the outstanding debt is known as the home equity. For instance, if your home had a market value of £200,000, and the outstanding mortgage was £120,000, you would have £80,000 of home equity.
This calculation means that if you sold your home, you would have £80,000 in your bank account, minus your property’s selling fees and legal costs, of course.
You should note that home equity is not a fixed figure and that it will fluctuate in line with the property market, and the amount that you borrow.
How Can You Maximise Your Home Equity?
Your home equity can increase through two main ways. The first is to pay off a portion or all of your mortgage. You do this as a matter of course with a repayment mortgage, as every month, you are reducing the amount of mortgage that is outstanding. You can increase the amount of equity further by making monthly over-payments or a lump sum payment. You should check with your mortgage provider, as often their terms & conditions have restrictions.
The second way of increasing your home equity is by increasing the value of your home. An increase in value can come from favourable market conditions, but obviously, you have no control over that. There is a way of increasing the value of your home, and therefore your home equity that you can control. It is by making home improvements. An extension, new bedroom, or adding ensuite bathrooms are good examples that will raise the value of your home. Not all home improvements will increase the value, so do your research before committing to work.
Accessing and Using Home Equity
Many lenders have specific financial products designed for you to borrow based upon your home equity. You might want to do this for a variety of reasons. Funding home improvements is an everyday use of home equity, and these can increase the home equity too. You might also decide to use your home equity to fund a special event like a wedding or your kids’ education.
You can access your home equity by one of two options:
- Equity Release. This option is available to homeowners of 55 years of age and above. This option is mainly aimed at people who already paid off their mortgage, or who only have a small amount remaining. Equity release can unlock without having to sell up and move. You use your home equity to borrow a specific amount, which can be received as a one-off lump sum, small regular payments, or both.
- Remortgaging. Remortgaging your home will allow you to borrow additional funds based on the amount of equity you have in your home. If we take the example, we used previously, where you had £120,000 remaining on your mortgage and £80,000 in equity. You could increase the mortgage amount to £150,000, for example. This example would leave you with £30,000 in cash.
You should consider your financial circumstances carefully before accessing home equity by either of these methods. Consider your future financial needs and not merely what you are facing at present. Make sure you shop around for the best rates possible to suit your situation.
Home equity is something that can become your most significant financial asset for new homeowners and prospective buyers. It can account for a considerable proportion of your net worth, and help protect you from unexpected economic shocks. Building it as early as possible will give you these benefits sooner and for longer.