Does equity increase over time on a repayment mortgage?

Devi

Sorry if this is a really silly question - i just wondered if equity in a property increased over time when you take out a repayment mortgage.

What do lenders take into consideration when renewing a fixed rate - just your initial deposit or how much equity you have built over the last x years of your mortgage?

Dave_Ham

Yes equity counts, although do be mindful on a traditional repayment mortgage the interest is front loaded and therefore not paid off capital equally.

Your existing lender may take a computerised view on the value, based upon similar sales in your location.

If you go to a new lender, they are likely to revalue the property and then your loan to value % will be given and access to those rates and products...

Devi

thank you - that is good to know.

D

jgh

Equity will increase if the price a buyer is willing to pay rises faster then the remaining mortgage debt decreases.
Eg, if after 5 years your house value has gone up by 6,000 and you've paid off 5,000 of your mortgage, you have 11,000 more equity.
Eg, if after 5 years your house value has gone down by 6,000 and you've paid off 5,000 of your mortgage, you have 1,000 less equity.

Another example, take the extreme edge case: if you buy for 100,000 and borrow 100,000, on day 1 you have zero equity, if your house value stays exactly the same, then on day 9132 you have 100,000 equity and between day 1 and day 9132 the equity increases by 10.94 per day.

9132 days = 25 years.

Annisele

jgh wrote: »

Another example, take the extreme edge case: if you buy for 100,000 and borrow 100,000, on day 1 you have zero equity, if your house value stays exactly the same, then on day 9132 you have 100,000 equity and between day 1 and day 9132 the equity increases by 10.94 per day.

That's only true if the interest rate is 0% - you've assumed that equity increases at a constant rate throughout the term, but with an interest rate above 0% that doesn't happen.

kingstreet

As you make payments, the capital balance of your repayment mortgage reduces. Not by very much in the early years, but it does reduce.

Provided the value of your property at least stays the same, the amount of equity you have in the property will be increasing as you repay that mortgage.

If the property value falls, your equity falls. If it rises, your equity increases. This bit happens regardless of your mortgage payments.

Phil_rich

Your equity will grow exponentially because at the begining you are paying for example £1000 per month of which £900 would be interest and £100 repayment, then the following month you have £100 less borrowing so the proportion of interest drops very slightly, so the second payment is £899 interest and £101 repayment and so on. Then in the later years the repayment out weight the interest so the equity levels shoot up each month.

There is a graph somewhere here on the forum that lets you put in your borrowing and time and it will show you what I have tried to explain.

Phil