What is Home Equity?

Full Definition

Home equity is the share of a property's value that belongs to the owner free of debt, calculated as the property's current market value minus any outstanding mortgage or other secured loan balance against it. Equity builds up in two ways over time: through the borrower gradually repaying the mortgage capital with each monthly payment (on a repayment mortgage, though not an interest-only one, where the capital owed stays the same throughout the term), and through house price growth increasing the property's market value independently of anything the owner does, though the reverse -- falling house prices -- can also reduce equity or, in the worst case, push a borrower into negative equity, where the mortgage balance exceeds the property's value. Homeowners can access built-up equity without selling the property in several ways, most commonly by remortgaging or taking a further advance to release some equity as cash (subject to the lender's maximum loan-to-value limits and an affordability check), or, for older homeowners, through equity release products such as a lifetime mortgage, which do not require monthly repayments but reduce the amount left for inheritance. Because home equity typically represents the largest single asset in most UK households' overall net worth, tracking it -- alongside pension and savings balances -- gives a fuller picture of a household's total financial position than looking at cash savings alone.

How Home Equity is calculated

Worked example: A home worth GBP 350,000 with a GBP 210,000 outstanding mortgage balance has GBP 140,000 of home equity.

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