How much equity do I have?

What does equity mean on a house? 

Mortgage equity is the difference between your outstanding mortgage debt and the current value of your property. So, if your house is worth £400,000 and you have £340,000 left to pay on your mortgage, this means you have £60,000 of equity in your home, which is 15% of your property’s value. When you’ve paid off your mortgage, you’ll have 100% equity.

What is a good equity to have in a house? 

It depends on your financial goals and personal situation, but having at least 20% equity in your house can be a good target to aim for. Having 20% or more equity can give you access to better interest rates when remortgaging and make it easier to buy a more expensive home if you sell your property for more than you bought it for. 

Some people use their home equity to invest in Buy to Let without having to sell their home or use savings as a downpayment. There are a few ways to do this, such as remortgaging, equity release or securing the mortgage on your investment property against your home.

Having a good amount of home equity is generally considered less risky than having very little equity, as you’ll be less likely to get into negative equity if prices fall. 

What is negative equity?

Negative equity is when your property is worth less than your mortgage, which can happen if there is a property crash, for example. This can cause problems when trying to sell your home, as the money you make from the sale of your property won’t cover your outstanding mortgage balance. If your home is in negative equity when you want to sell, you’ll need to get permission from your mortgage lender. You may have to use savings to make up the shortfall or keep making mortgage payments to your lender, even after moving out of your home. 

How do I find out how much equity I have? 

You can find out how much equity you have in your home in 3 easy steps.

 Step 1: First, find out how much your home is worth. You can do this with one of our free homebuyer reports, simply create a Tembo plan first to get started. 

Another option is to look at the sold prices of similar properties in your area. Look for homes with the same number of bedrooms and bathrooms, and similar features such as a garden or off-road parking. Make a note of 5 to 10 similar properties that have been sold in the last 12 months and use those to work out the average price. For a more accurate valuation, you can also speak to an estate agent. 

Step 2: Find out how much you have left to pay on your mortgage. You can find this information on your annual mortgage statement or by contacting your lender. 

Step 3: Finally, work out your home equity by deducting your outstanding mortgage balance from your property’s value. It’s that simple!   

How much equity do I have after 5 years? 

It’s impossible to say how much equity you have after 5 years without knowing your property’s value, mortgage amount and interest rate, but you can usually get a good idea with the following calculation:

Property value - outstanding mortgage balance = home equity 

Is it worth taking equity out of your house? 

Equity release lets you take money from your property and use it to make a big purchase, pay off an existing mortgage or give generously to loved ones, without using savings or taking out a personal loan. 

It can allow you to make the most of the money tied up in your property, especially if you’ve seen your property’s value increase over the years. 

However, equity release isn’t for everyone, and there are alternative options which could be better suited to your situation.

For example, if you’re looking for ways to reduce your Inheritance Tax liability when you pass away, equity release could help. However, if you use the money to give generously to family or friends and pass away within 7 years, these gifts may be taxable. 

The exact tax rate will vary depending on how many years have passed between the date the gift was given and your death. We explain how this works in more detail in our how to reduce inheritance tax guide. 

To find out whether it’s worth taking equity out of your house, speak to a financial advisor.

Learn more: Equity release or remortgage. Which is right for me?

Can you use home equity to pay off a mortgage?

Yes, you may be able to use the equity in your home to pay off your existing mortgage. There are a few reasons you might explore this option, but one of the most common is to keep your monthly expenses low in retirement. By paying off your mortgage using your home equity, you’ll no longer have to make monthly payments to your lender. This can give you peace of mind if your income changes in retirement or potentially free up cash to be spent elsewhere. 

However, using equity release to repay an existing mortgage won’t be right for everyone, so it’s essential that you get advice before making a decision.

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