Your home’s equity is a valuable financial asset with huge potential. But it’s also an asset you should exercise caution with. We talk to CEO and Co-Founder of SAM Conveyancing, Andrew Boast FMAAT MIC, to understand how you can calculate your home’s equity, how it can be used and when it should be used, and the things you should never use your home’s equity for.
How to calculate your homes equity
Equity is the difference between the current market value of your property and any debt secured (mortgage). To calculate you can use a valuation from a local estate agent, or a more accurate RICS current market valuation.
Current Value – Outstanding Secured Debt = Equity
How to leverage your equity
If you have enough equity in your home, you can apply for additional borrowing from your existing lender or apply to a new mortgage lender for a second charge, with consent from your primary lender. The minimum equity you must leave in your home is usually 10%; however, this may be higher if you are near retirement age or have a lower or less reliable income.
If you are older and are looking at releasing equity for your retirement, there are several equity release options such as a lifetime mortgage or a home reversion. These are much better regulated now than they used to be, but may come with significant risk including escalating rolled-up interest, so you should always seek proper financial advice on your specific equity release product.
What to never use your home equity for
You shouldn’t release equity where you won’t get a return, for example, to buy personal assets such as cars or boats which depreciate considerably and don’t earn any income. Investing in developing a property or buying a second, investment property should earn some income and also means the money is still available to be called upon if you need it back.
Investing in a business isn’t a ‘never’ but it is higher risk as you may never see a return on the investment if the business does not become profitable, so if you needed to repay the 2nd charge, you wouldn’t have the valuable second asset to sell and pay off the debt. You should never release equity in your home to invest in a business unless you are comfortable that you could repay the equity back into your home from your own earnings, if the business were to fail and you were to lose your investment.
Releasing equity on your own home comes with the same ultimate risk as any mortgage; if you do not keep up with your repayments, you could lose your home.
Other risks
Overextending your borrowing
If you max out your borrowing, you’ll have no buffer for the unexpected hiccups that may come up, whether that’s a period of illness, an increase in interest rates, or a downturn in property values.
Relationship breakdown
Your plans may rely on cooperation with another person, such as a joint borrower (unless you are married or civil partners) or a business partner. Make sure you have an exit strategy in case things turn sour; you can protect joint interests in property with a Deed of Trust.
Sometimes joint owners of a property will release equity, for which they are jointly and severally liable, to benefit just one of them. For example, an asset or a business in one party’s sole name, or large tuition fees for one party to retrain or go to university.
This means one party is a borrower and proprietor, taking on all of the risk, but with none of the benefit. Borrowing structures like this require Independent Legal Advice from a qualified professional, to make sure you understand the risk, and the lender can assert their rights if they are forced to repossess the property.
Summary
Equity can be leveraged to fund other purchases or investments, it is important to be clear on what your goals are, and whether you need to rebuild that equity in your home, or you are happy to release it for retirement and ultimately lose the property when you die or move into care. One thing to consider is that we are, as a population, living longer, and budgeting for sustainable comfort throughout a longer retirement is paramount.
Andrew, CEO, Executive Director, and Co-Founder of SAM Conveyancing, brings over 22 years of experience guiding thousands of clients through complex home purchases. A qualified accountant, he’s a recognised conveyancing expert who has advised The Telegraph on homebuying during the pandemic and successfully uncovered critical exclusions in the Government’s Help to Buy ISA scheme, leading to significant policy changes. Andrew is the author of several guides, including “How to Buy a House Without Killing Anyone,” and is a frequent commentator on BBC and other major news outlets, actively championing homeownership. He also mentors aspiring entrepreneurs at Royal Holloway University of London.
Featured image: charliepix
Thank you for your comment, Jack. I am so pleased to hear you found this article helpful (and importantly, easy to understand!).
Such a clear and helpful breakdown! Home equity can feel complicated, but you’ve made it simple and empowering to understand.