The equity in a property is best defined as the net surplus value that remains after any secured loans against the property are deducted from the property’s market value.
For example, where a home is worth £225,000 and the owner has an outstanding mortgage on the property of say £125,000, the homeowner can be said to have ‘equity’ in the property equating to £100,000.
If property values fall or the mortgage balance increases (perhaps during a period of non-payment) then the equity in a property will decrease. Eventually, the equity will reduce to nothing and possibly even become negative. For example, the homeowner may buy a house for £150,000 with a mortgage of £125,000. Values may fall by say 20% meaning the home is now worth just £120,000. With a mortgage outstanding of £125,000 there is a negative equity in the home of £5,000.
Nowadays banks and mortgage lenders are under an obligation to ‘stress test’ their lending criteria. Hopefully this will enable house buyers to raise mortgage funds based on sensible Loan to Value and income multiple parameters.
For more information contact us or speak to a mortgage adviser on 01628 507477.
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