But new financial burdens can also accompany the excitement of moving to a new home. One of the most repeated asks from homeowners is: “Can I use the equity I have in my house as a deposit when I move?” The short answer is yes, and many people use this tactic to make their next move cheaper. But how does it work, and what should you consider before tapping into your home equity?
What Is Home Equity?
Before we discuss how equity can be used, it’s important to understand what it is and how it works.
Definition of Home Equity
- Home equity is the amount of the property that you actually own. It’s the difference between your home’s worth in the current market and how much you still owe on your mortgage. In simple terms:
- Equity = Difference between Home Value and Mortgage Balance
- So, say your home is worth £300,000, and you have £150,000 left on your mortgage; you have £150,000 equity.
How Is Equity Built Over Time?
There are two primary types of growth of equity:
- Pay Down Your Mortgage: With each monthly mortgage payment, your debt decreases, increasing your equity.
- Increase in Property Value: If the market value of your home increases over time, your equity goes up even with the same mortgage balance.
Example Calculation
Imagine you bought a house five years ago for £250,000 with a £200,000 mortgage. Meanwhile, you’ve repaid £50,000, and the property is now worth £300,000. Your equity would now be:
- Home Value: £300,000
- Mortgage Balance: £150,000
- Equity: £150,000
That equity can be a financial weapon when it’s time to sell.
Can You Use Equity for a Deposit When You Move?
The good news is that you can use your house’s equity as a deposit when moving. Homeowners often do this, and it can smooth the road for your next home purchase.
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Utilising Equity to Pay a Deposit
Lower LTV Ratio: By using equity, you lower the amount of your new mortgage needed. A lower LTV ratio usually means lower monthly payments and better interest rates.
Performance—If you have a sizable deposit, which equity can achieve, lenders will take your mortgage much more seriously and be more likely to approve it.
Adaptability to Varied Situations:
- Upsizing: If you’re purchasing a bigger or pricier property, the equity can help meet the higher deposit demands.
- Downsizing: If you’re moving to a less expensive or smaller property, you might even have some leftover equity after paying the deposit.
How to Calculate Your Home Equity
To know whether you can use it as a deposit, it’s best to assess how much equity you have in your property. Here’s how to calculate it:
Steps to Calculate Equity
- Check Your Mortgage Balance: Call your lender or look at your most recent mortgage statement to see how much you owe.
- Find Out How Much Your House Is Worth: Online valuation tools or professional appraisers can help calculate a property’s value.
- Take your home value and subtract your mortgage balance, which is available for equity.
Example Scenario
- Home Value: £350,000
- Mortgage Balance: £200,000
- Equity: £150,000
- That £150,000 could then go towards a deposit on your next home.
Ways to Access the Equity in Your Home
When moving, there are several ways to access your home equity. So, let us unpack the three most popular approaches:
Selling Your Current Home
The easiest method to access your equity is by selling your current property. When you sell your home, the proceeds from the sale (less what you owe on your mortgage) are available for your next deposit.
Example
- Sale Price: £400,000
- Mortgage Balance: £250,000
- Selling Costs: £10,000
- Available Deposit Equity: £140,000
Home equity loans and HELOCs
- If you’re not yet ready to sell your home but need money for a deposit, you could:
- Home Equity Loan: A one-time loan based on your equity.
- Home Equity Line of Credit (HELOC): A revolving line of credit that entertains borrowings as needed.
Pros and Cons
ProsConsLower interest rates than personal loans risk of foreclosure if payments are missedFlexible access to fundsAdds to your overall debt burden
Remortgaging
Remortgaging essentially means refinancing your mortgage to free up some of your equity. This is a great option for homeowners with a lot of positive equity and financial stability.
Why Use Your Home Equity as a Deposit?
There are several financial and strategic benefits to using home equity:
Financial Advantages
Protect Savings: You won’t need to access savings or investments to pay for your deposit.
Reduce Your Monthly Payments: Making a larger deposit decreases your loan-to-value (LTV) ratio, which can result in lower interest rates and monthly repayments.
Strategic Benefits
- Buyer with Competitive Proposal: Buyers with meaningful deposits have a greater chance of being accepted by sellers.
- Opportunity to Purchase Outright: If you’re downsizing, your equity may enable you to buy your next home outright without a mortgage.
Risks and Considerations
While equity can be a great approach, it isn’t without risks. Here are a few things to keep in mind:
Trading Assets for Debt
Leveraging equity adds to your overall carry, affecting your fiscal health.
Effects on Financial Stability
Excessive leverage almost always makes your property more vulnerable to financial strain if your income or interest rates change.
Market Fluctuations
- If property values fall, you may have negative equity, in which your mortgage is larger than your home’s value.
- Step By Step Guide To Getting A Moving Loan Using Equity
- Here’s an easy roadmap to guide you on how to use that equity wisely:
Evaluate Your Finances:
- Determine your usable equity.
- Check the state of your credit score and debt-to-income ratio.
Explore Financing Options:
- Discuss HELOCs, home equity loans, or remortgaging with lenders.
- Shop around for terms, interest rates, and repayment schedules.
Plan Your Move:
Get pre-approved for your next mortgage.
Collaborate with real estate professionals to get an idea of costs and timelines.
Other Ways to Use Less Home Equity
If you don’t think using equity is the right option for you, explore these alternatives:
Savings or Investments
This will alleviate the need for more debt but could exhaust your emergency funds.
Bridging Loans
A short-term loan can bridge the gap between your current home and a new home, but these loans typically come with higher interest rates.
Frequently Asked Questions About Depositing Home Equity
Q1: Can I use my home equity to buy investment properties?
Lenders might have stricter requirements, like larger down payments and interest rates.
Q2: What if the value of my home decreases after I’ve borrowed against it?
- You may be at risk of going underwater, which freezes your ability to sell or refinance.
- Q3: Do HELOC funds come with any strings attached regarding how I can spend them?
- Some lenders may have restrictions, so review the terms carefully.
Conclusion
This makes transferring the equity in your home and using that as the deposit when you move a smart option, providing flexibility and potential savings. But the trade-off of pros versus cons is important, and details matter. It’s always important to run any potential options by financial advisors or mortgage experts to ensure you are making the best decision for your unique situation.
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