Home equity is the portion of your property you actually own — the market value minus what you still owe on any mortgage. As you pay down your mortgage and property values rise, your equity grows.
The Basic Formula
Home equity = Current market value − Outstanding mortgage balance
Example:
- Market value: £350,000
- Mortgage outstanding: £195,000
- Equity: £155,000
Equity as a Percentage (LTV)
Lenders express this as Loan-to-Value (LTV):
LTV = (Mortgage balance ÷ Property value) × 100
Equity % = 100 − LTV
LTV = (195,000 ÷ 350,000) × 100 = 55.7%
Equity = 44.3%
How Equity Builds Over Time
Equity grows from two sources:
1. Mortgage repayments (amortisation)
Early in a repayment mortgage, most of the payment is interest. Equity builds slowly at first, then accelerates.
| Year | Mortgage balance | Value (flat) | Equity |
|---|---|---|---|
| 0 | £250,000 | £300,000 | £50,000 |
| 5 | £226,000 | £300,000 | £74,000 |
| 10 | £196,000 | £300,000 | £104,000 |
| 20 | £112,000 | £300,000 | £188,000 |
| 25 | £0 | £300,000 | £300,000 |
2. Capital appreciation
If property values rise 3% per year:
| Year | Mortgage balance | Value | Equity |
|---|---|---|---|
| 0 | £250,000 | £300,000 | £50,000 |
| 10 | £196,000 | £403,000 | £207,000 |
| 25 | £0 | £627,000 | £627,000 |
Accessing Your Equity
Remortgaging:
Refinance at a higher loan amount to release equity as cash. Useful for home improvements, paying off high-interest debt, or investing.
Further advance:
Your existing lender lends you more on top of your current mortgage.
Equity release (lifetime mortgage):
Available to homeowners 55+. You borrow against the property without monthly repayments. Interest compounds until the house is sold (typically on death or entering care).
Equity as Collateral
Lenders use equity when deciding:
- Whether to lend (minimum LTV thresholds)
- What rate to offer (lower LTV = lower rate)
- How much you can borrow
Most lenders cap equity release at 80–85% LTV, meaning they require you to retain at least 15–20% equity.
Negative Equity
If your mortgage exceeds the property value, you are in negative equity. This occurs when:
- Property values fall significantly after purchase
- You bought with a very small deposit
- You extended the loan for other purposes
Negative equity prevents remortgaging and makes selling complicated (you'd need to pay the shortfall in cash).