Equity

Equity represents the portion of the property you truly own. Equity typically increases over time if you’re making repayments and, or, the property value rises.

Higher equity improves your loan-to-value, or LTV, ratio, unlocking access to better mortgage rates and products. This is because with a higher LTV, you are borrowing less. Having lots of equity (owning more of your home than you owe) can protect you if prices fall.

More equity gives you flexibility to remortgage on favourable terms. On the other hand, a low amount of equity in your home could limit the number of mortgage providers available to you if you want to switch mortgage provider.

Sometimes, your loan-to-value, LTV, can go down, even if you haven’t paid off much of your mortgage. This can happen if your home becomes more valuable. For example:

• the housing market goes up
• you improve or fix your home
• or you bought the property for less than it’s worth

If your home is worth more than what you purchased it for, your LTV may fall. This can help you get lower interest rates when you remortgage or switch deals, but the opposite can happen too. If house prices go down, your home might be worth less than your mortgage. This is called negative equity.

If you keep paying your mortgage and don’t sell, it’s usually not a problem. But you may find yourself at a loss if you are selling or remortgaging.

For example, let’s say you buy a house for £250,000 using a 10% deposit of £25,000 and take out a mortgage for £225,000 on a two-year fixed rate. The housing market then suffers a downturn over the next two years due to recession. Property values in your area fall 20% and your house is now worth £200,000.

You’ve managed to pay off £10,000 of the mortgage in the first two years, bringing the outstanding mortgage balance down to £215,000. However, if you needed to sell the house and got the market value of £200,000 for it, you could still owe the mortgage lender £15,000. You’d have to find the money from your savings, or take out an additional loan to cover the shortfall.

Throughout the life of your mortgage, the more equity you have in your home, the more you shield yourself from economic changes. For service families, this can be particularly important if future postings or relocation plans mean you may need flexibility to sell or remortgage at short notice.

In short, building equity strengthens your financial position, and gives you more options for the future. Whether you want to move, remortgage, or simply feel more secure in your home, growing your equity is a key part of making home ownership work for you.