If you bought your first home five years ago, you could be sitting on £50,000 worth of equity – but what can you do with your windfall?
Research from Savills shows that first-time buyers who bought a home a little over five years ago have benefited from significant equity growth.
But holding £50,000 in equity is not the same as having £50,000 in the bank. What does equity growth mean for your finances and how can you use it to your advantage?
First-time buyers have billions in equity
First-time buyers might be struggling to gain a foothold in the market, but those who have already bought are seeing solid returns. According to Savills, first-time buyers who bought in the 12 months to the end of June 2012 have now accumulated a total of £11.3bn in equity.
On average, these buyers paid a deposit of £32,366 and have gained £54,941 each through house price growth.
As you might expect, these figures are skewed by London’s property market, where 35,100 buyers benefit from above £5.7bn of equity – half of the overall total.
Have I missed out on the best gains?
If you’re yet to buy your first home, then sadly it’s true that you’ve missed out on a prime period for price growth.
The average property price in the UK in June 2012 was £170,049 – but by June 2017 this figure had reached £223,257.
Today’s buyers require bigger incomes and higher deposits than those who purchased in 2012, but wage growth is struggling to keep up with inflation.
This is reflected in the low number of property transactions that took place in 2016 and 2017, compared with the previous couple of years.
Getting on the property ladder
What is equity?
Equity is the value you hold in your property. To work out your equity, take the market value of your property minus the amount you owe on your mortgage.
The first way you acquire equity is through your deposit and mortgage repayments. As you pay down your loan, your share in the property’s value increases.
Equity also grows through market conditions – if property prices increase after you buy your home, your property will be worth more than the mortgage amount.
But the opposite applies too – if prices drop after you buy, your home could end up worth less than the amount you owe on it, a situation called negative equity. If you sold your home in negative equity, the proceeds of sale would not be enough to pay back your mortgage.
What can I do with equity?
While it’s a good thing to have positive equity, it’s not money you can withdraw at the cash point.
Price growth sounds great on paper but there’s no additional money in your pocket until you actually sell your property. Also, keep in mind that prices are not guaranteed to keep growing at the same rate – your property being worth an extra £50,000 after five years doesn’t mean it’ll be worth an extra £100,000 after a decade.
If you’re moving into a smaller property, you may be able to take the excess in cash. If you’re moving to upgrade, you can use the equity to put down a larger deposit or even buy outright.
Stepping up the property ladder
Keep in mind how market conditions might impact on your next move.
If you’re selling your property close to the ceiling price for your local market, you’ll have to buy at the top of the market too. This may limit the possible equity growth for your new home.
According to research earlier this year from Lloyds Bank, the price difference between a typical first-time buyer home and an ideal second-stepper property (a detached home with room for a growing family) is around £126,000 – a big leap, even if you have a good level of equity in your home.
You’ll also have to pay the costs associated with buying and selling, including agent fees, mortgage fees, solicitors bills and moving costs – see our moving house checklist for a costs breakdown.
Remortgaging to free up equity
If you want to free up some of the equity in your home, perhaps to fund home improvements, you could consider remortgaging your property.
To do this, you could either opt for a full remortgage, or what is known as a ‘further advance’.
Remortgaging from scratch could help you access better rates in the current climate, but you could be subject to early repayment charges, depending on your current deal.
A further advance involves taking on more borrowing from your current lender – but you should only really consider this if your lender is offering a highly competitive rate.
Before remortgaging, assess your other options (such as traditional personal loans). Remember that with tighter lending regulations now in force, your finances may be assessed differently than they were first time around.
Equity release schemes
You might have heard about equity release schemes, but in truth they’re unlikely to be the best way for you to make the most of your property’s value.
To begin with, they’re generally only available if you’re aged 55 or over, and while they allow you to access some of your home’s value in a lump sum, you’ll need to either sell off part of your home (home reversion) or have the loan and any interest repaid from your estate when you die (lifetime mortgage).