Equity in house. Now what?

[ANiceSliceOfCake]

Ok. I'm a bit of a novice in this department. We are in the nice position of now having equity in our house. We bought a doo'er upper and have done it up! So we have £188,000 left on the mortgage but based on sales in the area it's worth about 300,000. So technically we have about £112,000 equity in it. But what's the best thing to do?

It would benefit from a double extension on the back but we don't have the funds spare funds for that. But could we remortgage and 'release' the funds for it out of the equity?

Or can we use that equity as a deposit on a new one? Is that how it works?

I havnt a clue what's the best thing to do really and wondered what options we have?

Thanks.

[TennesseeMountainPointOfView]

yes, you can remortgage, the mortgage company will revalue it, and tell you what you can borrow, then it's up to you if you want to, based on what your new repayments will be.

if you sell, yes, you can use the equity as your deposit on a new house, and then take a mortgage for the rest of the price - or did you mean remortgage this house and use the cash to buy a second house? If so, you'd presumably be looking at a buy-to-let mortgage for that second house, and you'd need to meet the criteria for that, plus find out what taxes etc you'd need to pay as a landlord.

[ANiceSliceOfCake]

Thanks for replying,

It would be for another house. Maybe a slightly bigger one. It just seems too good to be true that we now have this equity to potentially use. I know years ago it was the done thing to buy a house, make money on it and get a better house but you don't hear of it as much these days.

[BananaPie]

Well unless you can afford a bigger mortgage, the equity doesn't mean much really!

Say you sold your house for £300k and wanted to buy a bigger one for £350k, you could use the £112k for the deposit, but that would still leave you with a 238k mortgage (plus you'd have to factor in moving costs).

You'd have the advantage of a good loan to value ratio, so would probably get a decent mortgage rate.

[Cressandra]

I'm confused what you want to do with it.

You now have a house worth £300k and you have £188k left to pay on it. You can sell the house and get a more expensive one but you will need to take out a mortgage for the difference, so your monthly mortgage payments will need to increase. Because you've done the work on the house, you'll only need to borrow an extra £20k to get a £320k house, rather than the £120k or whatever you'd have needed to borrow if you hadn't had that increase in value.

Remortgaging on a house you already own is another option, but ultimately you're only borrowing from the bank, and will have to pay them back more. Saving up for the extension or at least some of it is a cheaper option.

Don't forget to factor in your moving costs, which are many k if you're paying stamp duty.

[ANiceSliceOfCake]

Thanks banana that's kind of what I'm thinking, so basically what does the equity mean and what is the best thing to do with it, if anything atall.

cressandra that's the thing, I'm not sure what to do with it. I know an increase in house value is good as I can get a better LTV on the next mortgage, but am I missing something?

Maybe what I'm trying to say is what options do you have if your house had increased in value by a decent amount.

[PigletJohn]

Bear in mind that the words no lender wants rattling around inside your head are "get into more debt." But that's what it is. Interest rates are at historic lows and are only going to move one way from here. Find an old person and ask them what happened in the Thatcher years when mortgages went up to 17%.

[Cressandra]

Generally you don't do anything with it. It just sits there. One day, if you pay off your mortgage, you'll have 100% equity and you will mostly just enjoy living mortgage free. And if you chose to sell your house, you'd get it out as cash from the sale. But then you'd have nowhere to live.

I tend to focus on the outstanding mortgage rather than equity and house value. If your equity goes up by £50k due to general market rises, the price of a bigger house "next rung up" will probably increase by at least that much. Having equity is better than not having equity, but it's not really "free money" unless you cash it in by either selling up completely or moving to somewhere smaller. To move up the ladder, you still need to borrow more.

[NewLife4Me]

I would be wary, but that's me.
Far better to have equity than have a home repossessed because you can't keep up payments because interest rates have hiked. Especially if you have remortgaged for another bigger property.
It's up to you, how risk averse you are.
You don't have to do anything, you can just leave it there until you are mortgage free, then buy a house you love for cash.

[NewLife4Me]

PigletJohn

Old person, old bloody person. Take that back
I used to like you.

[bakeoffcake]

One way the equity is really an advantage is if you move to a smaller house or a cheaper area.

So if you sold yours and had £122 ,000 equity, you use that as a deposit to a cheaper area and buy a bigger house for say 270,000. So your mortgage would now be 148000 but you'd need moving costs too.

[ANiceSliceOfCake]

I certainly don't want to get into more debt, I just wondered if we've benefitted from the price increase as its an increase due to renovation rather than market value increase. I suppose we haven't gained anything then really in that sense.

[Ginmakesitallok]

It's not real money until you sell.

[ANiceSliceOfCake]

Ahhh well. It was fun while it lasted

[PigletJohn]

haha, sorry, but the Thatcher days are long gone and many people don't know how bad they were.

VAT doubled, unemployment trebled, mortgage interest trebled, 18% inflation, terrible industrial relations...

Tell that to today's youngsters and they won't believe you.

[daisychain01]

I guess when property prices were around £.29,000 for a 2 bedroom maisonette and £55,000 for a 3 bed house, it put the interests rate into a bit of perspective .... and there was Mortgage interest relief at Source MIRAS.which helped

[ANiceSliceOfCake]

I'm 36 so don't really remember Thatcher.

Just how do people afford to 'climb the ladder' these days !?

I do realise I'm lucky to even be on the ladder though.

[NewLife4Me]

That's the best way of looking at it imo.
Be happy that you aren't in negative equity and hope to hold onto your position.
House prices can go down too, which obviously lessens any equity you have.
I always look at it as possibilities for the future, maybe more choices as markets change.
It's just a number.

[Cressandra]

You have gained, you own a £300k house instead of the £200k house you'd have if you had bought something smaller and finished. That is awesome.

[ANiceSliceOfCake]

All true. I am honestly happy with out lot. It's just always nice to dream.

[Titsywoo]

We are in the same position as we did our house up that we bought 3 years ago and now have £120k equity. Our wages have also gone up so now if we sold we could have £100k deposit (taking off moving costs, stamp duty etc) and could actually borrow about £580k so we could buy a much bigger house. But we would prefer our lower mortgage payments and the comfortable lifestyle we have now so will probably take £50k out in 2 years and extend a bit more since we are in a good location.

[PigletJohn]

Yes Daisy, but you are forgetting wages.

MIRAS served only to raise the purchase price of houses, it was no help to buyers. Part of Thatcherite "economic theory" was that Asset Price Inflation was a good thing when it related to houses. However it is purely illusionary as a measure of increased wealth,

[NewLife4Me]

daisy

tell that to those who were repossessed and record levels of families in temp B&B I'm talking families with 2 working parents here too, lots of professional couples.
High unemployment too so if you lost your house and job, chances were you wouldn't just walk into a new job like previously.
Now I'm showing my age PigletJohn

[bakeoffcake]

I too remember the Thatcher days. We bought a house just before the crash, so went into negative equity overnight. I'd just had dd1 and was meant to be taking 6 mths off work. I ending up having to go back when she was 11 weeks old because our mortgage had gone up so much due to rate rises.
It was a very difficult horrible time for many people.

[specialsubject]

Old person -anyone over about 45. My professional starting salary after graduating was about 8k, and I couldn't afford a house on that. I did rent an unheated bedsit in sw something for 200 a month though.

And I also remember those interest rates .

[NewLife4Me]

special

Don't you start too. I'm nearly 50 but feel much younger than i did at 29, worrying about interest rates (not as bad as Thatcher, but still too high) and house prices.
So much more to worry about when you are younger. It's when my hair started going grey.

OP, you are doing well showing an interest and looking at options.
Do some googling and learn about this stuff. You don't have to be really clever to understand it and it can put your mind at rest too to be informed.