Equity

Equity is the name given to the part of a property you own. Upon buying a property with a 10% deposit, for example, you would own 10% of it with a mortgage in place to pay for the rest. Over time, you should gradually gain more equity in your property as house prices rise and you pay off your mortgage.

In the early years of a home loan, the amount owed is unlikely to change very much. However, you can still gain a greater amount of equity in the property if house prices rise.

For example, let’s say you buy a property worth £300,000 with a 10% deposit of £30,000 in place. Your loan is for £270,000. At that stage, you would have equity of £30,000 in the property. Over the early years, the value of the property rises to £350,000. Your mortgage amount remains much the same, but your equity would rise to £80,000 thanks to the rise in property prices.

As such, it is possible for the equity held in a property to fall in certain circumstances. If property prices fall, the equity will fall too. Some homeowners also borrow against the equity to release cash from the property. This can be done for a variety of reasons. Examples include releasing cash for home improvements that could increase the value of the property when selling it. Other examples include unlocking cash to help children with a deposit on their own property, or perhaps to go on a holiday of a lifetime.

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