Home equity means the portion of a property you truly own, after subtracting any outstanding mortgage or loans secured against it. It’s the difference between the property’s current market value and the amount you still owe to the lender.
What does home equity mean in property investment?
Equity is important because it represents your financial stake in a property. As your equity grows, you have more options – you can refinance to release funds, use it as security for another investment, or sell the property and keep the proceeds after paying off the mortgage.
How to Calculate Home Equity
Home Equity Formula
Example:
Equity = Current Market Value – Outstanding Mortgage Balance
- Current market value: £250,000
- Outstanding mortgage: £150,000
- Equity = £250,000 – £150,000 = £100,000
This £100,000 is your ownership stake in the property.
Why Equity Matters to Property Investors
- Growth through appreciation: If property values rise, your equity increases even if your mortgage balance stays the same.
- Growth through repayments: Each mortgage payment reduces your loan balance, boosting your equity.
- Leverage for portfolio building: You can use equity to fund deposits for buying additional properties. This is known as equity release or remortgaging.
