We all know that the equity you build up in your property is yours (in most cases) and that once it’s released, you can do other things with it. Can you, then, use the equity from one property as a deposit on another?
Can you equity accrued in one property as a deposit on a new property?
Yes, you usually can. Using equity from one property is the most common way in which people use this money. It’s also an eminently sensible use, too, as you’ll be lowering the amount you’ll need to borrow on your new mortgage. Not only does this mean a lower home loan, it also means a lower loan-to-value ratio, which can often result in lower interest rates on that new mortgage.
What is equity?
Your equity is basically the unsecured profit you’ve made on your home. It’s the difference between the market value of the property and the amount you still owe on the mortgage. Your equity is seen as unsecured because you haven’t sold the property yet, so it hasn’t been realised, and because the amount might change (going up or down) before it’s realised and released.
This all sounds great. Then, along comes every homeowner’s bogeyman – negative equity.
The equity you can use as a deposit, or release and add to your pension pot, is positive equity. Negative equity happens when you owe more on your mortgage than the property is actually worth. If this sounds like a bad situation, that’s because it is. If house prices suddenly drop so that your property’s market value is less than the amount you owe on it, then you can face serious difficulties in selling or remortgaging.
How to find out how much equity you have in your property
It’s very easy to find out how much equity you have. You simply need to find out how much the outstanding balance of your mortgage is and the approximate market value of your property.
You should get an annual statement from your mortgage provider, so take a look at your most recent one. Alternatively, you might have access to your mortgage account online, so you can get the most up-to-date balance, or you can simply call your lender to find out.
To find out your market value, you can either have two or three estate agents over to value the place or visit a property portal to see how much similar places in your area have sold for recently.
With these two numbers in hand, simply subtract the amount you owe from the value of your property to work out how much equity you have.
Once you have these two figures, subtract the amount you owe from the likely selling price and there’s your equity. Of course, it’s only ever an estimate until the deal’s done, but you can get a fairly accurate idea; just err on the conservative side and factor in the costs of selling and moving as well.
How to release the equity in your property
If the result of your calculation shows that you are in positive equity, you might now want to know how to get your hands on it.
Below are six ways in which you can do just that. The first two options are for those looking to move home, while the remaining four are simply alternative methods of borrowing against the money you’ve accumulated in your home:
If you find out you’re in positive equity, you might want to do something with it (or, indeed, just stay put and watch it grow a bit more…). If you do want to use your equity, there are six main ways to access it and use it:
- You can use the equity as a deposit on your next purchase
- You can (if you have enough) use the equity to buy your next property outright
- You can remortgage your property to reduce the size of your home loan by using the equity
- You can get a second charge mortgage
- You can take out a further advance loan
- You can access your equity via an equity release scheme
Can I use my equity on a buy-to-let property?
Yes, you can use your equity to help you to purchase a buy-to-let property.
As long as you’ve got enough equity built up in your primary residence, you can release some of it to put down a deposit on a buy-to-let property.
However, you need to be aware that BTL properties often need bigger deposits than residential properties, so be ready to part with 15-20% of the asking price. On the upside, releasing some of the money you’ve built up over the years is quicker than trying to save up a whole new deposit.
