Whenever you decide to remortgage you maybe asked about the value of your equity. But what is your mortgage equity?
Put simply, your equity is the share of the property you actually own. Homeowners who are remortgaging may use their equity to get more money or access better mortgage deals.
But, as ever in finance, there’s a little bit more to it. So here’s what you need to know and why it matters to you.
Mortgage equity explained
As we’ve already mentioned, the equity is the percentage of the property you actually own. While paying off your mortgage, you effectively increase your equity with each monthly payment.
- Let’s say your house is worth £180,000.
- With your deposit and payments, you still owe £153,000
- It means the value of the house you own is £27,000. So, your equity is 15%.
- When you pay your very last mortgage payment, you will own 100% of the equity – all of the property is yours!
Your equity also increases when the value of your property increases overall.
You may remember or have read about worldwide market financial crashes over the past few decades. During those times the term ‘negative equity’ was used.
It’s nothing to worry about but it’s always worth being aware of because while house prices have been rising, there could be a time when they fall. When that happens the value of your equity may also fall.
Negative equity is when the value of your mortgage is higher than what the property is worth.
How to build equity
The more mortgage you pay off the greater the percentage of your equity. Of course, you must make your monthly mortgage payments, but if it’s possible, paying extra (or overpayments) increases your equity. Make sure your mortgage allows you to make overpayments. Also, check out how much more you can overpay without penalties. If you’re unsure, ask your mortgage advisor.
Rising property prices also increases your equity. Quite simply, if the value of your home is worth more than when you bought it, you’ll have more equity.
Home improvements. If you make home improvements, such as adding an orangery or even and updated or kitchen, then this can increase your property’s value. As a result, you gain equity!
Is it worth building equity?
By building the equity in your home you maybe able to buy a more expensive home in future. This is because you’ll effectively have more cash towards a deposit. It also means you reduce the chance of having negative equity.
Paying a bigger deposit is the best way to build your equity.
If you’re looking to buy a new home and want help to calculate your equity, contact the team at The Mortgage Dog.
Your home may be repossessed if you do not keep up repayments on your mortgage.