For the majority of us the largest purchase we will ever make is when we buy a house; buying property is expensive, and it is also an investment.
Getting on the property ladder is one of those universal dreams many of us share. Of course making that dream become reality can be a challenge.
There are a few hurdles to overcome in reaching for that first property ladder rung.
First you need to save for the deposit on the property. With some new build and government schemes available, you may only need to save up as little as 5% of the sale price of a house for the deposit.
Some banks and building societies also offer specific savings programmes to help increase the amount you are saving for a deposit.
Next you need to be approved for a mortgage.
This involves being able to show you can afford the loan, and also having passable credit. Although, even if you have bad credit you can still get a mortgage. You may be required to have a guarantor, or possibly a larger deposit. The larger your deposit, the better your chances of getting the loan approved.
Then once your mortgage has been approved, and you move into your new home, you just need to pay the mortgage payments for the next 10 or however many years.
Investment and Equity
Buying a property besides being a huge expense, is also an investment.
As we pay down the mortgage loan, and hopefully the property appreciates or rises in value, we build equity.
Equity is the difference between what we may owe on the property and what the value of the property is.
If we owe £50,000 on a house worth £150,000, we are said to have £100,000 in equity.
Properties usually go up in value over the years, but we can also do some home improvements which may also increase the property’s value. All adding to our equity.
Some people like to think of their properties as part of their retirement and pension schemes. They will use the money in their property to help fund their pensions and retirements.
And this is and can be a good idea.
The questions that must be addressed when looking at equity in a property, is how do you access that equity?
How do you get the cash out of your house???
There really is only two (2) ways to access the equity in a property, sell the property, or remortgage it.
Not everyone is going to want to sell their house, as you still need a place to live, you would then need to let a place or buy another house.
Remortgaging is a way to get the money out of a property, but then you have the new and higher mortgage payment to pay each month. Plus, you still have to qualify for the new mortgage, show affordability, credit score, valuation of the property, etc.
For some older property owners, a reverse mortgage may be a way to access the equity that has built up in a property, without costing them payments each month.
A bank or lender will allow a portion of the equity in a property to be paid in monthly instalments to the property owner as income. Then when the owners dies, the bank takes the property back. This is all stated and agreed upon in the terms and conditions, and again allows the home owner to live in the property and receive a monthly income for a period of time.
There are some restrictions in doing a reverse mortgage, such as how much equity can be used, the age of the home owner, the time period, etc.
It is estimated that there is £5.6 trillion in equity in private residential properties across the country. That’s a lot of money just sitting there.
However, again, accessing this money is not that easy.
Many banks will allow a remortgage to access equity to consolidate debts and bills, and for home improvements, but not for holidays, to buy a car, or to start-up a business, or to invest in stocks or shares.
You need not just the right reason to remortgage to access the equity, but you also need to show you can afford the new and higher mortgage payments.
There also can be the issue of fees and penalties that may have to be paid if you remortgage. Some mortgage loans have fees and/or penalties associated with them if they are paid off early, or within a certain time frame.
By remortgaging to access any equity you could face paying these fees.
So the question as to if you should take equity out of your property, is answered and defined by, “can you take equity out of your property?”