Equity is simply the portion of a property that you currently own, expressed as a percentage offset against any debts secured against the building.
For example, if you are a homeowner with a mortgage that covers 60% of the property, you would hold 40% equity. If you own a property outright, you have 100% equity in it.
If you have a mortgage or are considering getting one, you’ll likely hear the term ‘equity’ used frequently in various contexts.
Below, we explain how equity works, how you can use it to your benefit, and what factors impact the equity you hold in your home.
How do you build equity?
When you buy a property using a mortgage, the majority of lenders require that you put down at least a small amount of deposit. While 100% mortgages exist, they are rare, and most lenders require a deposit of 5% at the least.
When you purchase a home with a mortgage, your initial equity is whatever deposit you put down, as the lender essentially owns the rest of your property until you repay them. As you gradually repay them over time, your equity builds.
The table below shows how the equity you hold in a property increases in line with your mortgage payments, using a property with a £300k mortgage secured against it for example purposes.
| Year | Remaining Mortgage Balance | Equity |
| 0 | £300,000 | £0 |
| 5 | £261,331 | £38,669 |
| 10 | £212,399 | £87,601 |
| 15 | £151,201 | £148,799 |
| 20 | £74,896 | £225,104 |
| 25 | £0 | £300,000 |
How the property market impacts equity
As well as repaying your loan, your equity can also be impacted both positively and negatively by changes in the market. For the most part, property tends to increase in value over time, however, this is not always the case. If the market crashes or your property falls into serious disrepair, it can also fall in value.
Equity is based on the amount of your property you own, compared to its current market value. This means that if your property suddenly increases in value, so does your equity, but if it falls, your equity follows.
This is why it’s riskier to buy a home with a 100% mortgage, you have no deposit to buffer any potential fall in property value. This means that if the property value falls at a faster rate than you repay the loan, you could end up owing the lender more than your home is worth.
What can equity be used for?
Equity will rise and fall as you repay your mortgage and in line with any market changes, but it won’t really impact you until you come to remortgage your home. Whether you’re remortgaging because your deal has ended or because you want to move to a larger property, your equity will act as a deposit in your borrowing. This means that the more equity you have, the lower interest rates you’ll qualify for on your remortgage deal.
If you’re hoping to get a bad credit remortgage, due to developing financial struggles since you took out your initial mortgage, it will be difficult without a good level of equity in your home.
Equity can also be used to borrow more money when you remortgage. Many people choose to ’remortgage to release equity’, which is essentially reborrowing some of the money they have already repaid for another purpose, or borrowing against a property’s increased market value. This is usually easiest when the property experiences an increase in value.
Releasing equity versus equity release
Due to the strong similarity in terminology used, these financial options are often confused. However, while they are both essentially using equity in your home, they are very different products.
We asked Lee Trett, director and co-founder of Money Helpdesk, to break down the difference between these two terms and explain them in an accessible way.
“Remortgaging to release equity for any purpose may be referred to as simply ‘releasing equity’,” he said. “This just means using the equity in your home as a deposit to borrow more money.
“Equity release, on the other hand, is a specific later-life lending product that requires specialist advice. This is aimed at older adults, above the age of 55, and allows them to access the proceeds of selling their home without actually selling it. The home is then sold on by the lender once they die to repay this.”
What is negative equity?
Negative equity is when you owe more on your mortgage than the current value of your home. If you don’t intend to remortgage any time soon, it’s not necessarily a problem – just a little frustrating. In the long term, the likelihood is that your property will increase in value again, however, there are no guarantees with home ownership.
It’s more likely that you’ll fall into negative equity if you don’t use a deposit when you buy your home, or if you use a very small deposit. You can also fall into negative equity fairly quickly if you fail to repay your mortgage.
