Equity in a property is usually defined as the difference between the outstanding mortgage or other liens against a property, and the market value of the property.
The technical definition is, “the market value of a homeowner’s unencumbered interest in their real property”.
In order to determine the value of any equity in a property, you need to know two numbers:
* The outstanding balance on a loans or mortgages against the property
* The current market value of the property
Value – Outstanding Balance(s) = Equity
Determining the outstanding balances on the mortgage or any loans against the property is easy to do, you simply get the current pay off, or amount left owed on the property.
Determining the market value of the property, can be slightly more difficult as an evaluation or appraisal will need to be done.
Some properties are unique, and difficult to value, others may be easier.
However, once you have these two sets of figures, you can calculate the amount of equity you may have in a property.
A property valued at £200,000, with an outstanding mortgage of £100,000, is said to have £100,000 of equity in the property.
A property valued at £250,000 with an outstanding mortgage of £100,000, is said to have £150,000 of equity.
Accessing this equity is the question, how to access your equity, your money in the property, and there are a few ways to do this, however, some ways to access the equity may only allow you partial access to some of the equity, not all of it. But there is one way to access all the equity in a property.
What is this partial access to equity, it is called LTV or loan-to-value.
In mortgage terms, loan-to-value is a term used by lenders as to the maximum amount they will lend against a property, and we will see why when we look at equity release loans.
LTV is used “to express the ratio of a loan to the value of an asset purchased.”
The easiest way to explain this is with an example, such as our examples before.
If a lender will lend 70% LTV to a property valued at £250,000, this means the maximum loan they will grant against that property is £175,000.
If that property has an outstanding mortgage of £100,000, the maximum equity the owner could access would be £75,000.
The current mortgage of £100,000 needs to be paid, leaving £75,000 until the full loan amount is £175,000, paying off the mortgage and leaving £75,000 to be paid out.
A lender is only going to lend a percentage against a property, be it 70%, 80%, or some lenders may go lower to 65%.
There are many variables that affect how much a lender may lend, credit scores, affordability, valuation, etc.
Sell the Property
If you wish to access all the equity in a property, the only way to do this is to sell the property.
An option not all homeowners wish to explore, but the reality is, if you want to access all the equity you have in a property, the only way to do this.
Remortgage the Property
The only other real way to access equity in a property is to remortgage it.
In essence this means taking out a new mortgage to pay off the old one, and increasing the loan amount to get the equity you have in the property; this is where LTV’s come into play. Lenders are only going to lend a certain amount on a property.
In the example of a property valued at £250,000, with a £100,000 outstanding mortgage, and with £150,000 of equity, if the lender will lend to 70% or 70 LTV, the maximum they will lend is £175,000, so then the owner could receive £75,000 over and above what the outstanding mortgage balance is.
If you remortgage, you are taking out a new loan, and the payments will be higher based on the new loan amount.
So the lender will insure the borrower can afford the increased mortgage payment.
Lifetime Mortgages: Another way to access the equity in your property is via a Lifetime Mortgage.
This for of loan allows the borrower to access 50% of the equity in their home, either as a lump sum, of a draw down, where you access portions of the money at a time.
Interest on the loan begins immediately, and the loan is paid off upon the sale of the property, or the owner is taken into care.
So usually a loan for someone older.
Home Reversion Plans: These mortgages are close to what a lifetime is, however as the owner, you are selling a portion of the equity in your home to the lender.
The owners sells 50% of the equity in the property to the lender, and the loan is repaid upon the sale of the property, and the owner is allowed to live in the property until death, or taken into care.
A homeowner with equity can also take out a personal loan which is secured against the property and its equity, but this is basically a second charge, and once again, the owner would have two payments each month, the original mortgage, and the second charge.