Can you use equity as a deposit for moving house?
For most people their biggest asset is their home. This means that the equity in their home is usually their most valuable asset too. But can you use the equity in your house as a deposit? Let’s take a look…
With most people it is the equity in your home that will be put towards a deposit to buy a new house. If the equity in your house has increased since you bought your home, you’ll be able to use it as a larger deposit. This will allow you to either secure a lower mortgage amount on your new house or to buy a more expensive home. Having a lower mortgage percentage typically reduces the mortgage rates, as this poses a lower risk to the lender. If you are looking to downsize and your equity is high enough compared to the value of your new house, you may even be able to buy a new home outright. If your equity is significantly large and you downsize in terms of house value and you buy a new house that has a value less than the total equity you release, you’ll have freed up some of your equity into cash.
What does it mean when you have equity in your home?
Equity in your home is the difference between the fair market value of your home less any loans or mortgages secured on it. For example, if your home is worth £250,000 and you have an outstanding mortgage secured on it of £175,000, your equity is £75,000. Over time as property prices increase, your amount of equity will increase. Also, if your mortgage is a repayment mortgage, then the balance of your mortgage will reduce at the same time as the amount of equity increases.
However, in a downward shifting property market, your equity can reduce as the fair market value decreases. If the worst happens and the fair market value goes below the balance of your outstanding loans and mortgages secured on your property, this is what’s referred to as negative equity. A home in negative equity is much harder to sell, unless you happen to have the excess in spare cash to repay the balance of any loans or mortgages off once your house is sold.
Can I use the equity in my house as a downpayment?
There are a number of ways in which you can access the equity in your home in order to use it as a deposit.
These include the following equity release options:
- Sell your house and cash-in on your equity and use this as a deposit against your next house.
- Increase your borrowing on your existing home to release your equity. Thereby giving you the extra cash required for a deposit. Usually in this example people are looking to change their home into an investment property to let it out to tenants. This happens in many cases because of a slow property market that’s making it difficult to sell. This results in many of the UK’s accidental landlords. For example, let’s say you are able to obtain a buy to let mortgage at 75% loan to value (LTV) (i.e. LTV is the amount of the mortgage as a percentage of the house’s total value). Let’s also assume your home is worth £350,000 and you have an outstanding mortgage of £150,000. Your new mortgage at 75% LTV would be £262,500, providing you with £112,500 release of equity from your home. This option will require you to become a landlord.
- Involve a property investor to take charge of your property and be the landlord instead of you. This way the investor would pay you a portion of your equity to allow you to use it to buy another property. The investor is then responsible for the tenants, the upkeep of your house and for the payment of your existing mortgage. You can effectively walk away and enjoy your new house in peace, without the worry of dealing with tenants. If this sounds like something you’re interested in, please contact us to discuss.
With options two and three, please bear in mind the additional 3% Stamp Duty on the second home.
Can I use the equity in my house as a deposit for a buy to let?
Yes you can use the equity in your house as a deposit for a buy to let investment property. That’s if you have sufficient equity in it to cover the deposit on the new property.
Typically to get a buy to let mortgage you will need to be able to put down a deposit of between 15-25% of the purchase price. The level of deposit will govern who you can borrow from and the rates of buy to let mortgage you get. The higher the deposit, and therefore the lower the loan to value percentage, usually the better the interest rate you’ll get.
Using this remortgaging strategy is how many property investors gain access to equity in order to grow their property investment portfolios.
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