Equity is the share of your home that belongs to you rather than to your mortgage lender. If your property is worth £300,000 and you have £200,000 left on your mortgage, you have £100,000 of equity. Your equity grows as you make mortgage repayments and as the property increases in value.
Equity is important because it determines what you can do with your property financially. You can release equity through remortgaging (borrowing more against your home), taking a second charge loan, or selling the property. The more equity you have, the better loan-to-value (LTV) ratio you can achieve, which typically gives you access to lower interest rates.
When you sell your home, the equity is the cash you receive after the mortgage is repaid and selling costs are deducted. Many people use the equity from a sale as the deposit on their next property.
Building equity is one of the main financial benefits of homeownership compared with renting. However, equity can also decrease if property prices fall, potentially leading to negative equity.
Sophie bought her flat five years ago for £250,000 with a £225,000 mortgage. She has since repaid £30,000 of the capital, reducing her mortgage to £195,000. The flat is now worth £280,000. Her equity is £280,000 minus £195,000, which equals £85,000. This gives her a loan-to-value ratio of about 70%, meaning she would qualify for competitive remortgage rates.
Key Points
- Equity equals your property's current value minus your outstanding mortgage balance
- Your equity increases as you repay your mortgage and as property values rise
- Higher equity means a lower LTV ratio, which unlocks better mortgage rates
- You can access your equity by remortgaging, taking a second charge loan or selling
- Equity can fall if property values decline, potentially leading to negative equity