Equity

Mortgages

Discover why building equity matters and how it strengthens your long-term financial position.

Transcript

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. More equity gives you flexibility to remortgage on favourable terms. But a low amount of equity in your home could also limit the number of mortgage providers when you want to switch mortgages.

If house prices fall, having substantial equity reduces the risk of owing more to the lender than your home is worth. Owing more than the value of the home is called negative equity. For example, let’s say you buy a house for £250,000 using a 10% deposit of £25,000 and taking 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.

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.

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