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A guide to equity

Equity is a common term in the world of investment that most people have likely heard of, but what does it actually mean, and how does it relate to your property?

What is equity?

At its most basic, equity is ownership. It refers to the value of the assets that you own once any liabilities or debts are taken away.

Where businesses are concerned, equity is the value attributed to the owners of the business, which is worked out as either the difference between the company’s assets and liabilities, or the company’s current share price. Or it can refer to the value of your share of a business (stockholders' equity).

What is property equity?

In a property context, home equity refers to the portion of a property that you actually ‘own’.

Although you may view your home as ‘yours’ in its entirety, if you borrowed money to buy the house, such as taking out a mortgage loan, then your lender has an interest of the property until you have paid them off. Your home equity is the value of the property that you own, minus your mortgage loan or any other shared ownership.

This doesn’t mean that your lender owns part of your property, however. Because you used the house as collateral for your loan, the lender will have secured their interest by getting a lien on the property. For example, if you purchased a property for £250,000 by making a down payment of 20% and using a mortgage loan to cover the remaining £200,000, then your home equity would be 20% of the property’s value which, in this instance, is £50,000.

How to build equity

The more equity you have, the more valuable it is and the higher portion of the property you own. There are two ways that you can grow your home equity:

  • The property value increases.
  • You decrease the amount of debt that you owe.

As you pay your mortgage loan back to your lender, your share of the property, and therefore you equity, will grow. Also, as a property’s value increases over time, your portion of the property will likewise grow. Using the above example, if the property value increases to £400,000, then your 20% portion will have increased to £80,000 without increasing your percentage of the property. As well as a rise in market prices, you can also increase the value of your property by adding valuable home improvements to the house.

You can also build up your home equity by eliminating your mortgage debt at a quicker rate by either choosing a shorter term mortgage or making additional payments. As you pay off your mortgage, your home equity will increase. Over time, you will grow your portion from 20% of the property’s value all the way to 100% when you have paid off the loan fully. Use our mortgage calculator to work out how much you could increase your mortgage payments by.

How to release equity on your property

 

Equity release is unlocking the value of your portion of a property to use it as a cash lump sum. There are various ways to release equity from your property:

  • Downsize to a smaller property
  • Take out a lifetime mortgage (if aged 55+)
  • Home reversion plans (if aged 60+)
  • Remortgaging

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