September 25, 2023 3:54 pm

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Nikka Sulton

Can I Use The Equity In My Home As A Deposit? Unlocking the value of your home through home equity can facilitate property investments. This article offers a practical overview of how equity functions and its implications, including its advantages and drawbacks.

If you’re contemplating a home equity loan or investment, this guide provides valuable insights to make informed decisions.


What Is Equity?

Equity, a fundamental concept in property, represents your home’s current market value minus your outstanding mortgage or any other charges on the property, like the Help to Buy Scheme. It signifies the portion of your property’s value that you truly own. To illustrate, if your property is valued at £330,000 and you still owe £200,000 on your mortgage, your equity stands at £130,000. However, this is often termed as unsecured equity because it’s theoretical until the property is sold and the final selling price is known. Keep in mind that the estimated value of your home doesn’t guarantee the sale price.

Once you’ve sold your property, assuming you get the full asking price of £330,000, you’ll possess £130,000 in equity that can serve as a deposit. It’s important to note that if you accept a lower offer and sell for less, your equity, and your profit, will decrease accordingly. Importantly, you don’t necessarily have to sell your property to access your positive equity. For instance, if you aim to purchase a second home or a buy-to-let property, the equity accumulated in your home can be utilized as a deposit for your new property.


Negative Equity

The property market can be unpredictable, leading to situations where a property’s value falls below its mortgage loan balance, resulting in negative equity. This occurs particularly when homes are purchased during property booms when prices are high, only to see their market value decline over time. Negative equity is the term used when you owe more on your mortgage than what your property is currently worth. However, it’s important to note that being in this situation doesn’t necessarily mean a bleak outlook. Property markets tend to recover from downturns, and as you continue to make mortgage payments, the outstanding balance gradually decreases.


How much equity do you have?

When contemplating the purchase of a second home using the equity from your existing property, the first step is determining the amount of money you’ve invested in your current home. This crucial figure helps answer the question: “How much do I have to put down for a second home?” Roughly, this can be calculated by subtracting the outstanding mortgage balance from the estimated property value. However, it’s essential to understand that you won’t be able to access the full equity amount unless you sell the property.

To navigate this process safely and securely, it’s advisable to consult with a mortgage adviser who can provide clarity on the available equity and ensure your plans align with responsible financial practices. Private Wealth Mortgages, for instance, is authorized and regulated by the Financial Conduct Authority (FCA) and a member of the Equity Release Council (ERC), guaranteeing a trustworthy and secure approach to releasing cash from your home.


Can you use equity in your property as a deposit on a new home?

Yes, you can use the equity accrued in your current home as a deposit for a new property. This is a common and practical approach for many homeowners. By leveraging your equity as a deposit, you reduce the amount you need to borrow for your new mortgage, effectively lowering your Loan to Value (LTV) ratio. A lower LTV opens up a wider range of mortgage options, including more favorable interest rates. Borrowers with lower LTV ratios often secure more affordable mortgages. It’s a straightforward and effective strategy for property investment.

Releasing equity from your home becomes most convenient during a remortgage, a favored choice for property investors seeking funds for new ventures. However, if your remortgage is not due soon or if Early Repayment Charges (ERCs) are still in effect, making early remortgaging expensive, you have an alternative: a further advance. 

A further advance involves obtaining additional borrowing from your current lender, typically at a different interest rate than your existing mortgage. You can use this sum as your deposit for a new investment property. Then, when the time comes to remortgage your home, you can tap into your home’s equity to settle the further advance.

This approach offers a quicker path to secure a deposit for an investment property compared to the gradual accumulation of savings. Remember, buy-to-let property purchases often require a substantial deposit of at least 15-25% for access to favorable mortgage rates.


Using home equity as a home loan deposit

You can utilize the equity in your home as a deposit for an investment loan, often referred to as “home equity release.” Generally, a 20% deposit is required for a home loan. Using the earlier example of having $264,000 in usable equity, this means you could potentially buy a property valued at $1,320,000 (0.2 x $1,320,000 = $264,000). However, loan approval involves considering various factors, including your credit history and your assessed capacity to meet repayment obligations.


6 ways to release equity from your house

When you find yourself in positive equity, you may wonder how to utilize it effectively. Here are six practical methods:

1. Use It as a Deposit: If you plan to move, consider using your equity as a deposit for your next home.

2. Buy Your Next Home Outright: Alternatively, you can use the equity to purchase your next home without the need for a mortgage.

3. Remortgage: Opt for a remortgage to access your home’s equity.

4. Second Charge Mortgage: Explore the option of a second charge mortgage for additional borrowing.

5. Further Advance Loan: Consider a further advance loan from your current lender, using your home’s equity as collateral.

6. Equity Release Scheme: Explore equity release schemes as another avenue to tap into your accumulated home equity.



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