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.

Younger people will be amazed to know that we didn't have homeless beggars sleeping in shop doorways before Thatcher.

Oi PigletJohn - less of the "old".
As someone else said, until this thread I've always thought you were such a nice chap

OP I'm not sure why you want to "do" something with the equity. Surely you choose to extend, or move house if you need more room, not to 'find something to do with the equity'.

backforgood the reason I ask what to do with it was to enquire if I was missing a trick somewhere. We could easily live in our house no problem without moving or extending, but if there were an option to have a bigger house, so no future children have to either share a room or go in the teeny tiny box room then I'd like to look at that. And I'd love a kitchen diner.

I often hear folk at work, who would probably be described as the 'baby boom' era say they made money on houses and moved up the ladder that way.

It's funny because when you google about equity in your home, most results are about buying a second home, rather than selling to get a better home.

Gawd yes, the eighties - a good few of our friends were badly caught out; they'd taken on huge mortgages and couldn't afford the repayments when interest rates shot up. It was awful.
We were renting at the time and our rent was £8 per week for a one bedroom flat in Greater London.
We eventually bought and the mortgage rate was 15 per cent when we took it on.

I think people who bought houses from about 1950 onward (though they had hard times as well) benefited from long periods of period of persistent inflation, which reduced the value of their debts (mortgages) and gave a geared increase in house equity. They also went through periods of price drops, when they would suffer from a geared loss in house equity, and sometimes a house worth less that the debt secured on it. If there was a gain caused by market fluctuations, it was a bit of a free ride since it was not caused by the efforts of the lucky homeowners. So I do not think that a tax on these windfall gains is unfair.

I have always thought that the price of houses can't increase exponentially for ever, otherwise a one-bedroom flat would eventually cost a billion billion pounds and nobody could afford it, which doesn't make sense.

My opinion on house price inflation is that if the price goes up (or down) it is still worth about as much as you need to buy a similar house. So unless you own more, or fewer, houses than you need to live in, it doesn't bring you more than a paper benefit.

In almost all cases, price inflation is viewed as undesirable,

OP I'd suggest remortgaging to get a better rate (due to better LTV) then with the money you're saving on your mortgage save up for the extension

if you want a bigger house you will need to take on a bigger mortgage.

so, now you have 188k mortgage on house worth 300k.

if you like where you are then save or remortgage and do the extension.

if you move the equity you can only get a similar house worth 300k - unless you increase your mortgage. if you want to go to 300k mortgage you can now get 400k house.

so the property ladder is meaningless unless you prepared to increase mortgage at each step.

the idea of property ladder is you buy proper with x mortgage and make money

you sell and buy next bigger property with equity as deposit and increase mortgage to x+y {as supposedly your wages have increased so you can afford more) you gain more equity

you sell and put equity towards even bigger property but unless you saving hard/paid off your mortgage you now have mortgage of x+y+z

problem in eg london is the next level eg one bed to two bed is 100k or more more expensive - unless you move to cheaper area.

so unless you get vast increases in salary or want to/can move area, you can be stuck at the bottom rung...eg job which wont increase to 100k salary, separation/divorce etc

what is going to happen in five years time when the people who bought in london with 40% help to buy for one bed flat of 500k and 55% mortgage want to move "up the property ladder"? their equity to carry forward will only be 5% plus what ever they paid off the mortgage....

What also happens is when many are repossessed the lenders quite often have to take what the property sells for, the market is flooded with houses to sell and it becomes a buyers market pushing down the value.
So even if you are one of the lucky ones who can afford your mortgage, your house may end up as worth half what you are paying for it.
This happened to people we knew as well as those we knew who were repossessed. It was still going on in the 90's as we were moving up the ladder then and we viewed so many repossessed they seemed like every other house we looked at.

You don't have to go all the way back to the Thatcher era, you can look at very recent history in Belfast, Dublin and RoI generally after the crash. The UK took a dip but no where near on the level experienced there.

To put it simply* there was a huge housing boom prior to the financial crash in 2008. Very similar to the London situation, massive bubble, undersupply in the market and banks lending without normal checks particularly to property developers. Cash was loaned out at very cheap rates and when the banks called in their loans the market collapsed from a height. Normal folk on the street are in massive negative equity. House values are in many areas under what they were at the turn of the century so even people who bought before the boom years have been badly affected.

*Obviously this is a very simplistic view of what has happened but I doubt anyone is that interested.

So to my point. The equity that has been created is a very nice thing to have, an artificial cushion if you will. If everything goes tits up in your personal life but the market is still good, you can sell your lovely home for £300k and cash in your equity, downsize and have a negligible mortgage. That's a lovely place of comfort to be.

We have created stonking equity in our home by refurbing it within an inch of it's life but mostly by sitting on our backsides watching the London market go mental. If we sold our home today and bought another for an identical value we couldn't afford to simply because of the stamp duty which would be £'000s.

If you are financial risk takers you could remortgage to extend or to BTL but a) can you afford the higher mortgage costs or b) would rental income less tax, void periods and management costs cover the mortgage.
Lots of people are and have done very well out of BTL . Lots and lots of people have also lost their shirts.

The real benefit is in selling up and buying somewhere cheaper so you have a non existent mortgage. Then you can spend/invest your cash on anything you like.

Yes, it's completely different to the 70s/80s when there was more of a ladder but it was a very slippery one!

Some figures to demo:
In 1970, avg house price was 5k, avg salary 1.8k
In 1975, avg house price 10k, avg salary 3.8k
In 1980, avg house price 24k, avg salary 7.6k

So if you bought your house in 1970, inflation meant that by 1975, your 5k mortgage had depreciated in real terms to a much smaller debt. Your debt stayed at 1970 levels but you now had a much bigger salary. By 1980, that debt had depreciated again and was easily less than a year's salary. The debt soon becomes dwarfed by your income, which means you can borrow more. Of course, the high interest rates that went along with the high inflation meant the mortgages were much MUCH harder to service than they were now, but for those who could continue to pay the interest, inflation drove their debts down to almost negligible. In 1980, if you still owned that house, you were paying off a debt of 5k, on a salary of 7.6k pa, and even at 15% that was often manageable. Whereas these days our debts are easier to manage because of the low interest rates, but they stay significant big lumps longer than my parents' first (several) mortgages did.

Also, the high inflation must have been a huge push to buy. In 1980, it made sense to push onto the housing ladder asap because if you waited 12 months, you'd have to pay 15% more for the same house. Rent, and your rent will climb year on year in line with your salary increases (ish). Buy, and your salary continues to rise while your debt doesn't. The same goes for anyone wanting to move up the ladder. It made sense to push yourself to borrow as much as possible, because high inflation meant it would soon come towards you. As long as you could keep paying those high interest rates - and not everyone could.

I'm 40 and we see it among our friends. Some bought for 70k straight out of uni, others for 200k 3 years later. What enabled those early buyers to move up the ladder was not huge chunks of equity per se, but the smallness of their existing mortgage (though I'm sure 70k felt huge at the time, and compared with their parents' 5k mortgages it was.) They could borrow an extra 100k to move up the ladder, whereas later buying friends were stuck servicing much bigger mortgages and couldn't. So OP think of yourself as the 70k mortgage holder rather than the 200k one. Your monthly payments are a good bit lower than they'd be if you had a 300k mortgage, you're better protected against negative equity, you are much more able to borrow more, because you're less risky to banks but more importantly because your mortgage is less per month, you may be living in a lovely home you wouldn't have otherwise afforded because you couldn't stretch to the full 300k at all. This is all very positive, and it's because your debt is relatively smaller rather than because the number of GBP of equity you have IYSWIM. Or that's my interpretation anyway.

I found this about price changes.

London is atypical

www.economist.com/news/britain/21697575-faulty-land-use-regulation-throttling-capital?fsrc=permar|image3

Not sure of the significance.

But read the final paragraph.

Thanks for all the different advice and opinions. Lots of food for thought.