What Is Equity in Your Home?

Home Equity Explained

Your home equity is calculated by subtracting your outstanding mortgage balance from your property's current market value. For example, if your home is worth £350,000 and you owe £200,000 on your mortgage, you have £150,000 of equity.

Equity builds up over time in two ways. First, as you make your monthly mortgage repayments, your outstanding balance decreases. Second, if your property increases in value, the gap between what it is worth and what you owe grows wider.

Equity is not cash in your bank account. It is locked up in the property. However, you can access some of it through remortgaging, a process known as equity release or borrowing against your equity. This can be useful for funding home improvements, consolidating debts, or other major expenses.

How Equity Builds Over Time

In the early years of a repayment mortgage, a large proportion of each monthly payment goes towards interest, with only a small amount reducing the actual balance. As the years go on, the balance shifts, and an increasing proportion goes towards paying off the capital.

Property value growth also plays a significant role. In many parts of the UK, property values have risen substantially over the long term, meaning homeowners who bought ten or twenty years ago may have built up considerable equity simply through market growth.

However, property values can also fall. If your home decreases in value while your mortgage balance remains high, your equity shrinks. In the worst case, you could end up in negative equity, where you owe more than the property is worth. This is why equity is not a guaranteed source of wealth.

Releasing Equity When Remortgaging

One of the most common reasons people remortgage is to release some of the equity in their property. This involves borrowing more than your current outstanding balance on the new mortgage. The difference is paid to you as a lump sum.

Common reasons for releasing equity include:

• Home improvements – funding renovations or extensions that could further increase your property's value.
• Debt consolidation – paying off higher-interest debts such as credit cards or personal loans. Be aware that by securing these debts against your property, you are putting your home at risk if you cannot keep up the payments.
• Helping family members – some homeowners release equity to help children or grandchildren with a deposit for their first home.
• Major purchases – funding significant expenses such as a new car or education costs.

When releasing equity, remember that you are increasing your mortgage balance, which means higher monthly payments and more interest over the life of the loan. Your home may be repossessed if you do not keep up repayments on your mortgage.

How Much Equity Can I Release?

The amount of equity you can release depends on your lender's maximum LTV ratio and your property value. Most lenders will allow you to borrow up to 80 or 85 per cent of your property's value, though some may go higher.

For example, if your property is worth £300,000 and you owe £150,000, you have £150,000 of equity. If a lender offers a maximum LTV of 80 per cent, you could borrow up to £240,000 in total. After paying off your existing £150,000 mortgage, that would leave you with £90,000 in released equity.

Keep in mind that borrowing more will increase your LTV, which may mean a higher interest rate. You also need to pass the lender's affordability checks for the higher borrowing amount. A mortgage broker can help you understand how much you could realistically release.