The world of house hunting is so full of jargon that it can be hard to separate the gazumping from the ground rent. ‘Equity loans’ are another term that takes some explaining, so we thought we’d do our best in this blog.
What does ‘equity loan’ mean when buying a house?
In property-speak, an equity loan refers to the money that some buyers might borrow to put towards a deposit when buying a home. Not everyone has access to a crock of gold (or the Bank of Mum & Dad) so equity loans can help those without a big stash of cash to get on the housing ladder.
How does an equity loan work?
Equity loan schemes come in different shapes and sizes. Most famously, Help to Buy – which is now closed for applications – lets buyers with a deposit of just 5% borrow 20% of the home’s value. This bumps up their deposit to 25%, with the mortgage comprising the other 75%. But every equity loan scheme comes with different bells and whistles; for example, Help to Buy is interest-free for the first five years, and the properties have to be sold by a Help to Buy registered homebuilder.
Is an equity loan only for new builds?
Not necessarily. While Help to Buy is only available for new build properties, Even’s equity loan is designed for pre-owned homes which have (in our humble opinion) a bit more character.
Is an equity loan a mortgage?
Basically – yes. In the industry, an equity loan is often referred to as a ‘second mortgage’, or sometimes a ‘second-charge mortgage’ or ‘secured loan’. This means your existing mortgage with your lender stays in place, but your equity loan acts as a second mortgage to help you raise money to buy a home. Even, for example, is a second-charge mortgage secured against your home.
How much equity loan can I get?
As we’ve explored, not all equity loan schemes are created equal. The Help to Buy scheme lets buyers borrow up to 20% of the property’s purchase price (40% in London) but with regional limits on the maximum price (£600,000 in London, compared to £186,100 in the North East). With Even, so long as you have a 5% deposit, you could borrow up to two times your deposit – up to a maximum of £100,000.
Are equity loans a good idea?
For many buyers, the hardest thing about purchasing a first home isn’t providing evidence of household income – it’s generating a deposit. According to Statista’s latest figures, in 2021 the average UK first time buyer deposit was £53,935, and in London it was an eye-watering £115,759. Sure, if you’ve got that kind of money, an equity loan may not be a good idea. But given exorbitant rents, many people simply don’t have that cash at hand, despite working hard and earning an income. For these buyers, equity loans can top up their deposit and help them secure their first home.
That said, borrowing money inherently comes with risk – we never pretend otherwise – so you’ll have to think carefully about whether you can meet the repayments over the long run. And it’s always worth remembering that if you’re unable to keep up with the payments on your mortgage or equity loan, your home could be repossessed.
Hang on – what is equity?
In this blog we’ve covered how equity loans work, but it’s worth explaining what ‘equity’ actually is. If you buy a property, the equity simply means the value of your home minus the amount you owe on the mortgage. In other words, equity is the percentage of the property that you own outright.
Just like a ham ‘n’ cheese omelette, your equity has three ingredients:
- Your deposit
- The amount you’ve paid off on the mortgage
- Any increase in the value of your home, or ‘capital appreciation’.
How equity works
Let’s say you buy a £300,000 property with a 10% deposit (£30,000) and borrow £270,000 on the mortgage. Then a few years down the line, let’s imagine your repayments have reduced your mortgage to £200,000 and the home’s value has risen to £350,000. Your equity would comprise your £50,000 increase in value, plus the £70,000 you’ve paid off, plus your original £30,000 deposit. This would give you a total of £150,000 in equity.
In this scenario, you could sell up and pocket the £150,000, or take out ‘equity release’ to access the money while living at the property, or do nothing and stay forever. Of course, there is no law of nature that says house prices will rise forever; the dreaded ‘negative equity’ is where your home is worth less than the amount you owe on the mortgage. There are swings and roundabouts, so with Even, we take a share of the pain when house prices fall (restrictions apply).
No buyer should be locked out of the housing market simply because they don’t have access to a treasure trove. If you’re interested to learn more about Even, find out how it works and register your interest – we’d love to help out if we can.