Can I use equity as a deposit for moving house? Here’s everything you need to know.
What is equity?
Equity is the difference between the amount of debt you have secured on your home and the current value of your home. For most people, their mortgage will be the only debt secured on their home.
So, if your home is worth more than the outstanding balance on your mortgage, you have equity in your home or are in ‘positive equity’. If your mortgage is more than your home is worth, you are in ‘negative equity’.
How do I know if I have equity in my home?
Check your mortgage statement or call your lender to find out how much you owe on your mortgage. Then ask a local estate agent to value your home, or check its value online.
If your mortgage balance is less than your home is worth, you have equity. You can work out how much equity you have by doing the following simple calculation:
E = V – M
V: value of your home
M: outstanding mortgage amount
How to access your equity
Using equity as a deposit
The most common way to use equity in your home is to use it as a deposit when you move house. This lowers the amount you need to borrow as a mortgage.
For example, say you have a £100,000 mortgage on a house worth £250,000. This means you have £150,000 equity in your home.
If you bought a house for £300,000, you could use the £150,000 as a deposit, and take out a mortgage for the other £150,000.
Doing this would mean you would be eligible for some of the cheapest mortgage rates on the market. This is because your loan-to-value (LTV) would be low at 50%.
Your LTV is the proportion of the property’s value you are borrowing as a mortgage. Each mortgage product comes with a ‘maximum LTV’. This figure is normally between 50% and 95%. Mortgage lenders offer their cheapest mortgages to borrowers with a low LTV.
Using your equity to buy a home outright
In some circumstances you might be able to use the equity in your home to move house and be mortgage-free.
This is commonly referred to as ‘downsizing’ although you don’t necessarily need to buy a smaller house – you could move to a cheaper area instead.
In the above example, you might sell your home for £250,000, and use £100,000 of the money to pay off your mortgage. If you bought a home in a cheaper area using the other £150,000, you’d be mortgage-free and own your home outright.
Borrowing against equity
You don’t have to move house to access the equity in your property – there are several ways you can borrow against the equity in your home.
In the above example, you might remortgage your home for £150,000. You’d use £100,000 of the remortgage money to pay off your existing mortgage, leaving you with £50,000 in cash.
You could use this money for whatever you wanted – home improvements, to buy a car, pay off debts, and so on.
If you didn’t want to remortgage, you could take out a ‘further advance’ loan on your home from your existing mortgage lender and leave your current mortgage in place.
A further advance usually has a higher interest rate than a mortgage and will also be secured on your home – meaning if you fail to repay it, your home could be at risk of repossession.
Second charge mortgage
Another option is to take out a second mortgage on your home with a different lender. This is known as a ‘second charge mortgage’, ‘homeowner loan’ or ‘secured loan’.
The debt would be secured on your property. This means if you fail to repay it, your home could be at risk of repossession.
Equity release is a way for homeowners aged 55 or over to access some of the money tied up in their home without having to move house.
Things to consider
You should think very carefully before borrowing against the equity in your home, as it will increase the amount you owe.
Most people should aim to build up the equity in their property as much as possible, rather than accessing it or borrowing against it.
This will give you options for borrowing should you have a financial emergency such as losing your job. It will also make it quicker and easier to become mortgage-free.
Need a mortgage adviser?
Want to explore your options and find the best option for you? We can connect you with a mortgage adviser who can help. Request a quote below.
Last Updated: November 22nd, 2021