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What is equity in a home?

Natalie Wilson

Jun 21, 2024

When you’re house hunting, you’ll probably hear the term ‘equity’ being thrown around often.

In fact, if you’re looking to sell up to make the move to a roomier new build, equity is probably at the forefront of your mind. However, despite being familiar with the phrase, it can still be hard to grasp the concept of what it fully means. So, what is equity in the mortgage context? Our all-encompassing guide will walk you through everything you need to know.

What is equity in a home?

Equity is how much money within your home that you own outright – i.e., the amount of money that you’ve paid off your mortgage, in addition to the deposit. The more money you have paid off, the higher the amount of equity you own.

Equity in a home – examples
Equity can be confusing in the abstract – so instead, here are a few examples to help you grasp what equity in a home is, and how it works.

Here’s an example:

Your house was worth £200,000 when you bought it.
You had a 20% deposit of £40,000.
Your mortgage at the time of purchase was £160,000.

At this point, you have £40,000 of equity – the amount of money you’ve put into the house.

After two years, you’ve paid £20,000 through regular mortgage payments.
Your home’s market value doesn’t change in that time.

You then have £60,000 of equity in your house: the £40k from your deposit, and £20k from mortgage payments.

Alternatively:

After two years, you’ve paid £20,000 through regular mortgage payments.
The area your home is in has had new developments and your home’s market value has increased by £10,000.

You then have £70,000 of equity in your home: the £40k from your deposit, £20k from mortgage payments, and the £10k of market value increase.

How does equity work on a house?

To work out how much equity you have on a house, subtract the outstanding mortgage balance from the current value of your house. The resulting figure represents the equity you hold in your property.

If you can put down a bigger deposit when you’re buying a house, you’ll have more equity from the beginning.

How do I use the equity in my home?

You can use your home’s equity as a deposit towards your next home. If we use the example above, assuming you have £70,000 of equity in your home, when you go on to buy a new home, you can use that £70,000 as a deposit, meaning that you can apply for a mortgage with a lower loan-to-value rate, or LTV. Lower LTV mortgages are less risky for lenders, so you’re likely to get better mortgage rates.

How can equity be accessed without selling?

It is possible to release equity from your home without selling by remortgaging your home. In typical circumstances, people remortgage to reduce their mortgage repayments or when their current mortgage deal is due to run out, but you can also use your remortgage to unlock equity. This works by increasing your mortgage loan to increase the equity. Essentially, you’re just borrowing more money.

Equity can also be accessed through an equity release without having to sell your home. However, usually, an equity release is only available to homeowners who are 55 years or older. It enables them to access the equity from their home and convert a portion of it into cash through a range of financial products. The funds can then be obtained in one lump sum, in smaller amounts, or a mixture of both.

It's important to always seek financial advice when looking to release equity.

How to increase equity in your home

House location value

When your house value increases over time, so does the equity. Several factors can increase house value, including a thriving property market and rising demand due to new developments.

A desirable location, heightened supply and demand, along with favourable interest rates and economic conditions, all contribute to boosting your house value.

This is why people talk about ‘up and coming areas’ – if the house location value is likely to rise, then your equity will as well, making it easier to move when you’re ready.

Paying down your mortgage

Every time you make a monthly payment on your mortgage, you are increasing your equity stake because you are reducing the outstanding amount owed on your mortgage. So, the more you pay off, the more equity you’ll own.

Putting down a large deposit for your home will also increase your equity by reducing your loan-to-value ratio (LTV), meaning your equity stake will be bigger if you choose to sell up.

Read our guide on how to save a deposit for a new home for tips on how to save up for a bigger down payment.

Home improvements and renovations

Certain home upgrades can also contribute to your equity. When you invest in improvements that increase your home's value, you effectively enhance your ownership stake in the property. This means you’ll bolster the value of your home when you sell.

As the heart of the home, kitchen renovations are one of the most popular ways to add value you to your home. Likewise, bathroom makeovers can also increase your home value as well as spacious open layouts. In fact, even minor adjustments such as upgraded fixtures and fittings can make a difference.

Of course, if you’re buying a Strata home, then you’ll benefit from having a brand new kitchen and bathroom, as well as open plan layouts and other high value features that will add value should you every choose to sell in the future.

Overpaying on your mortgage

You can also increase equity on your home by overpaying your mortgage, either through a lump sum or choosing to make increased monthly payments. This will significantly reduce your interest payments over time, and therefore reduce the outstanding mortgage balance faster, meaning you’ll own more of the house sooner.

Getting on the housing ladder is an important first step – but circumstances change over the years. If you’re outgrowing a starter home or feeling tired of your first house, then hopefully you’ll have some equity in your home, allowing you to think about moving up to a new house with more room. Our homes are ideal for second-steppers looking to make the move to a bigger, future-proofed house – take a look at our collection of contemporary new homes to see if one is right for you and your family.

And for more tips on house buying, take a look at some of our other articles – learn what credit score you need to buy a house, or discover the stages of a new build home to help you understand the timeline of purchasing a Strata home.

What is equity in a home?

When you’re house hunting, you’ll probably hear the term ‘equity’ being thrown around often.

What is equity in a home?

Here’s an example:

How does equity work on a house?

How do I use the equity in my home?

What happens to equity when you sell?

How can equity be accessed without selling?

How to increase equity in your home