How do you build equity in a home?
How to build equity in your home
Are you planning on moving house soon? Or perhaps there have been changes in the property market and you’d like to check your status as a homeowner. Understanding how equity works and how to build equity in your home can help you take control of your financial future.
There are clear, practical steps you can take to build equity. Here’s a look at how this can be done.
What is mortgage equity?
Equity is the portion of your home that you own outright that doesn’t have any outstanding mortgage debt attached to it. The amount of equity you have in your home is based on the current market value of your property minus what you still owe your mortgage lender.
For example, if your home is worth £300,000 and you have £200,000 left on your mortgage, your equity is £100,000. The £100,000 is the amount that belongs to you.
The equity you have can be a very important tool to help you reach your financial goals. You might use it to secure better mortgage terms when it’s time to remortgage, or to cover the cost of renovations to increase the value of your home in the long run. Equity can also be used to help buy another property.
Why is it important to understand mortgage equity?
Equity represents real wealth. Although you can’t spend it like cash, you can release it, borrow against it or use it to build more value. By understanding how much equity you have in your home, you can gauge your next steps. Ultimately, the more equity you have, the stronger your financial position tends to be.
How to work out how much mortgage equity you have
You can calculate your home equity in two steps:
- Find out your home’s current market value
Begin by using a mix of sources. You can check local sales on websites like Rightmove. There are also online valuation tools, such as the one from Zoopla.
If you’re seriously considering a house move or want to get a detailed overview, a formal valuation from an estate agent could be the right strategy for the plans you have.
- Subtract your outstanding mortgage balance
Once you have the valuation figure, check your latest mortgage statement or log into your online mortgage account to find your outstanding balance. You can then make the calculation to get your equity amount.
For example:
Your home is worth £280,000.
You owe £170,000 on your mortgage.
Your equity = £280,000 – £170,000 = £110,000.
To express this as a percentage, divide the equity by the property value:
£110,000 ÷ £280,000 = 0.393, or about 39.3% equity.
This figure matters when remortgaging, as better rates often go to those with higher equity, which is also known as a lower loan-to-value (LTV) ratio.
How does equity build in a home?
There are a few ways to build equity. But when it comes to knowing how to build equity in your home, it’s important to be aware that you aren’t limited to taking just one approach. A combination of methods can go towards boosting the amount you have; being proactive can go a long way.
Pay off more of your mortgage
Every time you make monthly repayments on your home, you build equity. However, if you only ever make the minimum required, progress is slow. You can speed things up by making overpayments. You’ll need to check that your mortgage terms allow overpaying. Many lenders let you pay up to 10% extra per year without incurring charges. Check your mortgage agreement or speak with your lender directly first.
If you can afford it, overpaying regularly can take years off your mortgage and save you thousands in interest.
Add value to your home
Improving your property can increase its market value, and this in turn raises your equity. But not all upgrades make a financial difference so it’s important to focus on changes with the highest return on investment.
Popular improvements include:
- Converting a loft
- Kitchen revamps
- Adding off-street parking
- Garage conversion
- Cellar conversion
Make sure you have planning permission in place if needed, and check whether improvements could impact your council tax band or insurance.
Also, think carefully about how you’ll fund these updates . At Evolution Money, we offer home improvement loans up to £100,000. Check if you’re eligible today.
Property value increases
House price growth can help increase your equity, so it’s worth keeping track of the market. But you can’t rely on the dial swinging in your favour. Markets fluctuate, and local factors often outweigh national trends. That’s why paying down your mortgage and making smart home improvements should always come first.
How long does it take to build equity in your home?
This depends on several factors that are unique to your circumstances. Your mortgage deal, repayment habits and property value, plus the local housing market, are all things that can impact how long it could take you to build equity in your home.
Typically, in the early years of a repayment mortgage, most of your monthly payments go towards interest rather than reducing the loan itself. This means your equity builds slowly at first.
If you can overpay or secure a lower interest rate through remortgaging, you’ll reduce your loan balance faster. In a stable market, many homeowners start to see a meaningful shift in their equity position after five to 10 years.
However, if you bought with a small deposit of 5% to 10%, it could take longer. The less equity you start with, the more susceptible you are to market downturns or slow growth.
What is negative equity?
Negative equity happens when your outstanding mortgage is more than your home is worth. For instance, if your home is valued at £180,000 but you still owe £200,000, you’re £20,000 in negative equity.
This situation can make it difficult to move or remortgage, as lenders view it as a higher risk. It can happen if house prices drop sharply, or if you bought with a very small deposit and haven’t built up enough equity through repayments.
If you’re in negative equity and need to move, talk to your lender early. Some lenders offer negative equity mortgages in limited circumstances, but options are usually restricted.
Focus on equity in your home with Evolution Money
If you’ve fallen into negative equity, Evolution Money may be able to help. We offer low equity loans of up to £50,000 that can be used when your equity has decreased. We’re regulated by the Financial Conduct Authority and rated ‘excellent’ on feefo, so you can rest assured that we provide the highest levels of service.
To find out if you can access our low equity loan or if you’re planning home renovations and need some funds, check your eligibility with us today. If you’re a homeowner aged between 21 and 70 and live in the UK, we may be able to help you.
For more tips and guides, check out our help and advice hub.
Representative 28.96% APRC (Variable)
For a typical loan of £26,600 over 180 months with a variable interest rate of 19.56% per annum, your monthly repayments would be £484.00. This includes a Product Fee of £2,660.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £87,030.00. Annual Interest Rates range between 11.7% to 46.5% (variable). Maximum 50.00% APRC. *Lending Fee varies by country: England & Wales £763, Scotland £1,051, Northern Ireland: £1,736.
Think carefully before securing debts against your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
