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What is mortgage equity?
Mortgage equity is the difference between what you owe on your mortgage and the current value of your property.
Here's an example
- Your house is worth £200,000.
- You have £170,000 still to pay on your mortgage.
- The equity you have in your home is £30,000. This is 15% equity.
- When you've paid off your mortgage, you'll have 100% equity.
How to build equity in your home
There’s a few ways to increase the equity in your property:
1. Mortgage payments
Making your monthly mortgage repayments will reduce what you owe. As you do this, your equity will increase.
2. Property value increases
If your home is worth more than when you bought it, you'll have more equity in it.
3. Home improvements
Home improvements can add value to your home.
As your house value increases, so could the equity.
Why it's good to build equity in your home
Building the amount of equity you have could help you in a few ways:
- You could buy a more expensive home if you sell your property for more than you bought it for.
- You could benefit from lower mortgage rates if you are wanting to remortgage.
- You can use the profits from the sale to purchase another home or pay off other debt, or invest it elsewhere.
One way to build equity is to pay a bigger deposit when you buy your property.
- If you buy a £200,000 home and put down a 20% deposit, you'll have £40,000 equity in your home from the start.
- If you put down a 10% deposit, you'll have £20,000 equity.
If you're able to overpay on your mortgage, you'll build equity faster. Make sure you check if there are any limits on overpayments to avoid an early repayment charge.
What is negative equity?
Negative equity is when the value of your property is less than you owe on your mortgage.
For example:
- You owe £220,000 on your mortgage.
- Your home is worth £200,000.
- You are in negative equity of £20,000.
Negative equity usually happens if house prices fall, either in your area or across the country.
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