How does using Equity from current property work to buy another property?

LiveOnce

I came across this option when I was talking to a mortgage adviser. He was using the scenario of a currently mortgaged property and using that property's equity to buy another.

He tried his best to explain it but I couldn't quite get my head around it.

Could anyone please explain with an illustrated example how it works please?

G_M

Are you planning to sell or keep the current property?

If keep, then you go to your current mortgage lender (or inded a new one) and ask to increase your mortgage. Assuming they agree, they give you the cash and you use it towrads your 2nd purchase (remembering a 2nd property will incur additonal SDLT).

If you're selling, then you sell and buy simultaneously (same day). You receive the money on your sale from the buyer, pay off the mortgage, and use the equity that's left overtowards the purchase price of your new property.

LiveOnce

I will be keeping my existing property.

I still don't understand what Equity means sorry.

AnotherJoe

Equity = what you sell house for minus the mortgage.
It's the "value" in the house that is yours after you've cleared the mortgage.

The only way you can use the equity in your house, if you aren't selling it, is to get a mortgage against it which will release money you can use to buy the new one.

Typhoon2000

Equity is what your house is worth less what you owe on it. Typically you would sell your house and pay off your mortgage and what ever is left is your equity.
If you don't want to sell you can borrow some of this 'equity' from a bank via a bigger mortgage ( with your current or a different lender). You then use this extra borrowed money on your existing house to buy or put towards another.

LiveOnce

Thank you both that explains it nicely.

How is Equity normally calculated? What property price does it use?

Let's say I have £150,000 remaining on a mortgage and my property is currently worth £500,000 (based on last sold prices of houses in my street). Then what is my equity?

scatterbrain109

£500K - £150K =£350K equity

Jo

journeymanpro

£4 Trillion

Typhoon2000

If using your existing lender they may use a house price inflation index like the Halifax index or a more formal valuation. If you are changing lenders it will be a traditional instructed valuation..

Rambosmum

Ok, so your house is worth £200k and you have a mortgage, which is £90k. Your equity is £110k.

Your lender would value the house (but you can get an idea what it is worth by looking at similar properties in the local area on rightmove).

In the scenario the adviser was talking about, you would then borrow more money on the mortgage so lets say increase your mortgage to £150k but as you already own the house, the extra £60k would go in to your bank account for you to do with as you wish, e.g. use as a deposit on a new house.

But remember, you will have to pay the second home stamp duty land tax.

Tiners

For someone who is struggling to grasp the absolute basics of what ''equity'' means, please tell us you're not looking to buy a second property in order to become a BTL landlord.