How Does Equity Work When Selling a Home UK 2024

Deciding to sell your property involves many considerations and steps. Whether moving to a new home or selling one of your properties, selling your home doesn’t need to be a challenging process.

During this process, you may encounter the financial term ‘equity’ with plenty of other jargon. When you pay off the mortgage, you gain equity in the property and every month, you own more of it. In our guide, we’re sharing what equity is, what happens to the equity when you sell the property and how equity release can affect this.

What is equity in property?

Equity is a financial term for the remaining amount of money when the house has sold after paying the expenses, such as fees and debt. For example, if the property sells at £200,000, you’ll need to deduct the remaining mortgage, the estate agent/solicitor fees and any other expenses to give you the equity amount. Usually, the most significant debt to pay is the mortgage, depending on how long you’ve lived at your property. Say the remaining mortgage is £100,000, and the fees are £15,000, then your equity will be £85,000 after the property sale. The more of the mortgage you’ve paid off, the more equity you’ll gain.

Equity in property starts as the deposit you pay to secure the home and then predominantly builds from the mortgage payments every month. The housing market condition also adds value to your home over time, increasing the equity you have in the property further. You receive the equity after paying the debts and the property sale.

How does equity work when selling a home?

Most people sell their home to buy another using the equity gained from the sale towards the deposit or for the whole property when downsizing. If the new property is more valuable than the equity you’ve earned, you can put the sale money toward a deposit, which can sometimes reduce monthly payments. If the equity acquired is more than the value of your new home, use it towards other means, such as investment or retirement.

When you sell your home, the income made pays off the remaining mortgage and other legal fees. The remaining is the equity you’ve acquired. If you sell the house for more than the outstanding mortgage, you’ve made a profit and gained equity. However, if the property sells for less than the remaining mortgage balance, you pay the difference due to negative equity.

Equity isn’t always about what you gain when selling your home. Negative equity generally happens when house prices fall or if you’ve opted for an interest-only mortgage. These types of mortgages mean you only pay the interest on the amount you borrow instead of repaying the mortgage and gaining equity.

Preventing the risk of negative equity is possible before selling your home. You can look at ways to improve the property, increasing its value, even during a financial crisis. There’s the option of renovations, such as an extension or making more mortgage repayments until the remaining loan is less valuable than the property.

When you’ve sold the property and the income has paid the mortgage or settled the difference due to negative equity, you’re no longer responsible for making mortgage payments.

What is equity release, and can I sell my home if I have it?

Equity release is another consideration when selling your home if you meet the requirements (or you’re planning for your future). Essentially, it’s taking out some cash from the value of your home.

Open to homeowners aged 55 or over, equity release allows you to access a percentage of your home’s equity. The money is tax-free, allowing the homeowner to live in the property and not make mortgage repayments whilst alive. When the homeowner passes away or the property sells, you pay.

There are two types of equity release, including a lifetime mortgage and home reversion.

A lifetime mortgage is a common type of equity release because it allows homeowners to receive cash as a lump sum loan, which accrues interest. In other words, a mortgage against your home that you don’t repay until you pass away or the property sells. Once the property sells, when the interest and loan amount settle, the remaining funds go to the homeowner’s estate. You can make repayments at a time or wait for interest to accrue and clear it after selling.

Home reversion is different to a lifetime mortgage. This type of equity release allows you to sell part or all of your property to a home reversion provider for regular payments or a lump sum. With this, you can live in and maintain your property. Your percentage in the property won’t change until more equity is released, but when the house sells, the profits go-between yourself and the home reversions provider.

Equity release has many benefits and drawbacks, such as tax-free money and reduced profit on your current home.

Many choose to release equity to provide for the family or enjoy the later stages of life with more cash to live with. With equity release, you will have steady monthly outgoings but an increasing amount of disposable income, meaning the hefty process is worthwhile in the long term.

Despite the benefits, the most significant disadvantage to equity release is it’s not eligible for everyone. Most lenders want you to have a small portion of your mortgage to pay or own the property outright before you opt for equity release.

You can start the equity release process with a financial advisor to explore your options and the implications. Then, you’ll talk to the equity release provider about why you’d like to sell, and they’ll give you a figure and how much to repay. Your home then sells through an estate agent or online with us. Once the property sells, the solicitor will advise you about repaying the equity release loan. If funds are left over, they’re yours.

If you’re swaying towards the equity release option, whether to raise funds or achieve some life goals, you can sell your property online fast for cash. As selling your home is a daunting process when going through the traditional method of an estate agent, selling online to us as cash buyers can reduce the stress of your decision and selling process.

Sell Your Property Fast For Cash & Free

Are you considering selling your property fast? We’re a trusted team of expert cash buyers, purchasing properties for cash and handling the entire process, including solicitor costs. Our team can advise your property’s value and make the sales process quick and smooth.

Our flexible approach means the journey is down to you. We help you choose a suitable completion date and sell within seven days minimum. Contact our team today and see how we can help you sell your property quickly.