A home is one of the biggest purchases that most of us make.
In addition to keeping a roof over our heads, buying a home offers the chance to build equity.
Equity is the portion of your property that you actually own—the difference between its market value and any outstanding mortgage debt. It should represent growing wealth as you pay down your mortgage or as your home's value increases.
Of course, you need a home, which might make your growing equity a figure that means very little. The equity you have built is locked away in bricks and mortar.
But knowing your equity can be important for several reasons.
Not only does it represent what you could get for your home if you sold it, it could be the key to unlocking wealth while staying right where you are.
Making the calculation
Home equity represents the difference between your home’s current value and your remaining mortgage balance. You’ll need to gather some information to calculate your home equity accurately.
The first step is to find out what it is worth in the current market. You could approach an estate agent or two. They know the area, and what price buyers are prepared to offer in it and have probably sold similar homes in the recent past.
Alternatively, you could do some simple desk research. Rightmove and Zoopla have online tools to provide a rough estimate. They may not be as accurate as the view of someone whose local pricing knowledge is their bread and butter, but they can provide a figure which is reasonably close.
If you have lived in your home for a few years, it may come as a pleasant surprise.
Next, you’ll need to determine how much you still owe your mortgage lender. You can find this out from your most recent mortgage statement or signing into your loan provider’s online dashboard. If you have trouble finding how much you owe, you can call the lender directly.
So how can you use the wealth you have built up?
There are several ways you might use your new-found wealth.
Consider remortgaging. Switching to a new mortgage deal with a higher loan amount lets you borrow against the equity you've built up. You can then use the released funds for various purposes such as home improvements, debt consolidation, or investing.
You could potentially use the funds as a deposit for a buy-to-let property. Rental income from the investment property can provide a source of additional income, while any property appreciation can further increase your wealth over time.
You might also use your home equity to boost your pension savings.
Equity Release Schemes. Lifetime mortgages or home reversion plans allow homeowners aged 55 and over to release equity from their property without having to move out. With a lifetime mortgage, you borrow against the value of your home, and the loan plus interest is repaid when you die or move into long-term care. Home reversion plans involve selling a percentage of your property to a provider in exchange for a lump sum or regular payments while retaining the right to live there.
Home Improvement Loans. Many lenders offer specific home improvement loans or secured loans that allow you to borrow against the equity in your home for renovation, extension, or refurbishment. This might do more than simply enhance your home comforts. It could also potentially add value to your property, in effect paying for itself.
Get an expert on your side
Before you look closely at any of these options, it's essential to consider your financial goals, assess the associated risks, and seek professional financial advice to ensure you make informed decisions that align with your circumstances and objectives.
Using the equity built up in your home can have pitfalls, as well as boosting your financial power. To discover how to avoid them, and the best way to make your home, work for you, call us at Continuum.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a particular mortgage product and you should seek independent financial advice before embarking on any course of action.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
The value of property investments and income from them can go down as well as up and investors may not get back the amount originally invested.
Home Reversion plans and lifetime mortgages are complex products. A lifetime mortgage is a loan secured against your home. To understand the features and risks, ask for a personalised illustration. Equity Release will reduce the value of your estate and may affect your entitlement to means tested benefits.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available
You may have to pay an early repayment charge to your existing lender if you remortgage.
Think carefully before securing other debts against your home.
