Your home equity is the value of your financial interest in your property. To put it in simpler terms, it’s your home’s current market value minus any outstanding debt attached to it. The more equity you have in your home, the more valuable an asset your property is for you. Therefore, it’s beneficial to grow your home equity as much as possible. But how can you do this, and is it within your power to do so?
Let’s look at the most effective ways to grow your home equity quickly.
Your home equity will fluctuate over your mortgage’s lifetime. As you make repayments, you will reduce the amount of debt, increasing your home equity. Generally, over time, the market value of your home will increase, again increasing equity.
However, house prices can also drop due to the economy and market forces, and this causes a reduction in your home equity.
The most dramatic example we’ve seen of this in the past couple of decades was during the financial crisis of 2008 when UK house prices dropped by 20%. We’ve also witnessed a more recent price retraction following the UK Government’s mini-budget.
Why is increasing your home equity important?
Generally, as your home equity increases, the amount you owe on your home goes down. However, equity represents more than a shrinking mortgage; it provides you with an asset against which you can borrow. You might wonder, what’s the point of increasing your debt when you aim to pay off your mortgage? Borrowing against the value of your home, known as equity-based borrowing, typically attracts lower interest rates than personal loans or credit cards.
Therefore, you can use your residence to fund significant financial events such as home renovations, weddings, or university education.
As mentioned, market forces and the economic environment can affect your home equity. Of course, you can do little to influence these macro situations.
However, you can do a couple of things to grow your home equity; increase its value or reduce the outstanding debt. Let’s look at each of these methods.
The value of your home will go up in line with the housing market, but you have no control over this. To see any significant rise in value through market conditions, you must be patient and ride out fluctuations over several years or even decades. However, the housing market generally remains on an upward trend over the long term.
To increase its value quickly, you can make renovations and home improvements. Significant changes to your home or even minor cosmetic improvements can soon boost its value. For instance, adding an extension, installing new windows, rewiring, or even redecorating can add value, thus increasing equity by varying degrees.
Of course, you could be making improvements to improve living conditions or create more space, so growing equity might not be your primary goal. However, if your main aim is to increase equity, it would be a good idea to do some research before starting work.
In this case, the cost of any improvements or renovations mustn’t exceed the potential increase in equity. For instance, your area might have a property price ceiling, so it’s advisable to check before going ahead with your work.
Completing regular maintenance is also essential to protect your home’s value and equity. Keeping gutters clear, maintaining outdoor areas, and routinely servicing the central heating system will ensure potential buyers have less reason to reduce offers when selling your home.
As you pay off your mortgage, the amount you owe will reduce, and your home equity will grow. However, there are a few things you can do to accelerate this.
#1. Put down a large deposit
The bigger deposit you can put down on your home, the less capital you’ll need to borrow, giving you more equity from the start. For instance, if you can put down a 25% deposit compared to 10%, you’ll start with 15% more equity. And the less you borrow, the less you’ll pay in interest. The money you save each month can then be used to top-up your mortgage repayments, further boosting your equity.
#2. Make regular overpayments
Overpayments will help increase your equity in your property in a couple of ways. Firstly, reducing the loan amount means your equity increases as a result. The other way is that the interest you pay will decrease. Interest is calculated as a percentage of the outstanding balance. If more of your repayment is going to pay back capital, this will reduce much quicker, increasing your home equity.
#3. Make occasional lump sum payments
If you receive a windfall or unexpected income, consider paying it into your mortgage account. Doing so will give your home equity a significant boost.
Building equity in your property will provide you with financial security and a source of wealth. You can boost your equity with some concerted effort. With the points shown in this article, you can increase your home equity quicker than just waiting for the market to have an effect.
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