To ask you to explain home equity like I’m 10?

[FlyingSoap]

If you buy a house for £250,000, make some improvements and sell it 2 years on for £270,000, is the £20k yours? Or does some belong to the bank if you’ve mortgaged the house?

Whatever is left over after your mortgage balance is your equity, it’s as simple as that.

Home equity is the value of your house if you sell it today, minus your mortgage. If the house is worth 270k today and you have 100k left on the mortgage, your equity is 170k.

You borrow money from the bank as a mortgage.

If, for example, you borrow £150,000 of the £250,000 house, the rest of the money will have come from you. So you own £100,000. I.e your equity it £100,000

If you sell I for £270,000 you still owe the bank £150,000 ( plus interest)
So you now have £120,000 in equity. Or cash if you just sell the house and keep the money.

If you buy a house for £250,000, make some improvements and sell it 2 years on for £270,000, is the £20k yours?

Yes, it's yours.

If you took an interest only mortgage so didn't actually pay anything off your loan capital in that 2 years, you'd still owe the bank £250k yet the house is now worth £270k - you pocket the difference. Minus any fees of course (Solicitor etc).

It’s all about the mortgage, if a cash buyer yes it’s yours. If mortgaged it depends on if it’s early repemption and any fees.

Well no, it depends on the fixed term and redemption fees. Why answer if you don’t know.

The equity is the difference between the homes value if sold today, and the amount you owe on your mortgage if you paid it off today.

So if you bought for 250k and let's say have only paid interest, you still owe 250k
If you sell for 270k the 20k is yours, you pay the mortgage provider 250k

If you default on the mortgage and they reposses the house they will sell it and some of that equity will go on fees, plus they won't be bothered how much they get as long as it covers what they are owed

You buy a house using £X of mortgage from the bank. The bank then makes money from you by charging interest on £X (generally, the longer the mortgage term, the more interest you pay and there may be penalties for paying more than the agreed amount each month).

If you sell the house, you have to pay the whole mortgage straight back unless you have agreed to move to another house with a mortgage from the same bank. However, if you didn’t need another mortgage, you would just have pay back the bank the original £X plus any interest and penalties and could keep any excess (after lawyers’ fees, conveyancing fees, any taxes etc).

When you buy a house with a mortgage you own it and the bank has a charge against it in case you default on the loan repayments. The bank only gets the repayments per the loan terms. Your equity increases as you pay down the loan, if the price of the house rises as a result of a rising market and if you make improvements that increase the value of the house.

Let's say you bought for 250k and you had 50k deposit and borrowed 200k on your mortgage. You sell for 270k, you repay 200k to the bank and you keep 70k. If you have already repaid 10k of the capital through monthly repayments then you keep 80k and give back 190k.

Equity is the value of the house minus the outstanding mortgage / sale fees

In the past, there were some shared equity mortgages, where if, say, you borrowed £100k on a house worth £500k, then the lender was entitled to 1/5 of the eventual sale price. As I recall, they were quite popular with older people on low incomes who couldn't afford monthly mortgage payments to repay the loan. But, they fell out of favour because house prices shot up and lenders got huge returns eg 1 / 5 of a house that was worth way more than when the loan was taken out

You'll have paid down the mortgage in that time as well. Example figures:

In 2010, you buy a house for 170k with a 20% deposit = Your mortgage is £136k.

By 2020, you now owe, say, £95,000.

You sell the house, which has now risen in value, for £240,000.

When you sell the house, the buyer will transfer that sum to you, less the outstanding mortgage.

So you'll get £145,000. Most people use this to fund their onward purchase, either to buy a bigger house, or buy something else outright, etc.

Don't forget redemption fees, solicitors fees, EA fees, moving fees, stamp duty, etc needs to also be paid when buying/selling/moving.

You always owe the bank the same amount of money- what you borrowed plus interest- regardless of the value of the house.

Most of what you pay only covers the interest. It doesn’t significantly reduce the amount you’ve borrowed for quite a while- fifteen years into a 25 yr mortgage. Gradually the balance shifts and you start to reduce the amount borrowed.

All that’s dependent on what you borrowed, your interest rates etc, but broadly speaking.

As PPs have said, the equity is the difference between what you owe and what you make.

Just to point out it works the other way as well, if you buy a house for £250k with £50k of your money and having borrowed £200k, but house prices fall and then you sell the house for £170k, you still owe the bank £200k, so once youve given them the £170k, you have to find another £30k.

Basically, you owe what you’ve borrowed, you pay back monthly some of that if you have a repayment mortgage, but if you make a profit or a loss, the bank still only gets what they lent you (plus interest you agreed), you get to keep the profit or have to swallow the loss.

Yes it's yours.

With a mortgage the amount of profit the bank is going to make from the deal is fixed in advance via the interest rate. The risk of losing out massively if
house prices crash, and the potential reward of making a profit if prices rise, solely belongs to the person or people making the purchase, not the mortgage lender.

By contrast many help-to-buy and shared ownership schemes are set up to share that risk and reward between lender and borrower - in exchange for not having the same level of interest rate as a mortgage lender does, those lenders make their profit by taking a slice of the equity if the property value increases (which it usually does, barring economic collapse etc)

House purchase price = £250k with £25k deposit + £225 mortgage
House sold price = £275k
Equity available for next purchase - £50k.

In a nutshell - yes the £20k is yours. Your mortgage (loan) is still the same.

Lots of great examples on here already, OP.

I'm just pointing out that if you have more equity (value) in your house purely because prices have increased, so will other properties you might want to buy. Eg, in a rising market:

• 2 bed bought for £250k - sold 2 years later for £270k
• 3 bed bought for £300k - asking price 2 years later - £330k

So unless you are selling up and no longer need to buy, the equity is 'on paper' on many ways

When you buy a house that you can't afford to buy outright (which is the case for the vast majority of people), you take out a secured loan (in this case, a mortgage) in order to buy it and agree a rate of interest and a schedule of repayments with the lender.
The loan is secured against the house. In other words, if you don't, or can't, keep to the repayment schedule the lender can then recover the full amount of the loan from you by forcing the sale of the house through a repossession order.

The house belongs 100% to you. But there's a loan secured against it, so you must keep up with repayments.

So, now onto what we call "equity". The difference between what the house is worth and what you still owe to the mortgage lender is your equity.

When buying a house you normally pay a deposit up front and the remaining cost of the purchase is from a mortgage loan, so the amount of deposit you paid will be your equity initially.

Over time, the value of the house may go up but your mortgage amount remains the same, so the amount of equity you have increases.

Here's an example. You buy a house in Year 1 for £250k, paying a deposit of £50k and taking out a mortgage for the remainder. So, at this point your equity is approximately £50k.

Over time, the value of the house may increase. Perhaps by Year 10 it will have increased to £400k, for example. In that case, your equity would be £200k if you had an interest-only mortgage or somewhat more if you had been repaying capital on the loan. (ie equity is the value of the house minus what you owe).

When you sell the house, providing the house is your main home and isn't a 2nd home, holiday let or rental property, then all of the equity remaining after the sale has completed is yours and there is no tax to pay.

If the house is not your main home then you would need to pay capital gains tax on the amount that the property had increased in value.

Well no, it depends on the fixed term and redemption fees. Why answer if you don’t know

I do know and I literally said 'minus any fees' in my post @Myblindsaredown . Learn to read.

Yes, it's yours.If you took an interest only mortgage so didn't actually pay anything off your loan capital in that 2 years, you'd still owe the bank £250k yet the house is now worth £270k - you pocket the difference. Minus any fees of course (Solicitor etc).

you clearly indicated it was hers, and your post was written badly. You specifically stated you’d owe the bank 250 and pocket the difference, and called out fees like a solicitor. She wouldn’t pocket the difference, if you meant early redemption penalties you should have written this.

OP we bought our house in 2010 for 120k with a 75k mortgage.

The mortgage is now paid off.

Our house is currently valued at around 220k, so our equity is 100k.

(That's right isn't it? 😏)