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Improve your home, increase your equity

2 June 2008

If you’re a homeowner and you owe less on your house than it’s worth, you have what is known as ‘equity’. A simple equation:

You should have equity if:

• You have put down a deposit,
• You have paid off some of your mortgage, and /or
• Your house has risen in value

There is currently some worry about ‘negative equity’ – when you owe more than your house is actually worth.

An example. If:

• Your house is worth £100,000,
• You put down a £20,000 deposit, and
• You’ve paid off £10,000 on your mortgage,

…then you have £30,000 of equity. However, if the value of your home drops by £40,000, then you’ll owe £10,000 more than your house is worth – you’ll have £10,000 of negative equity.

Increasing your equity
It’s always worth looking into ways of adding to the value of your home and increasing your equity. A few wisely chosen home improvements could mean more than just nicer surroundings to live in – they could add value to your home, meaning more equity.

This could give you extra spending power should you choose to move. Also, if house prices drop in the future, the increased equity would mean your house value would have to drop a lot further before you fall into negative equity.

The other side of the coin is that it’s possible to spend a lot more on home improvements than you’re actually ‘making’ – so the value might increase, but you’ll still lose money.

Considerations for home improvements
Before you start a project, it’s very important to weigh up:

a)how much it will cost, and
b)how much it will add to your home’s value.

Some home improvements are more valuable to than others. As reported in The Telegraph, RICS (the Royal Institute of Chartered Surveyors) state that the most valuable improvements are, on average:

• Off-road parking
  • Cost: £650
  • Benefit: £10,000
• Landscape garden
  • Cost: £900
  • Benefit: £6,000

On the other hand, it’s possible to make big losses. The worst offenders, according to RICS, are:

• Garage conversion
  • Cost: £25,000
  • Benefit: £0
• Building a basement
  • Cost: £50,000
  • Benefit: £4,000

It can be worth spending money just to have a nicer home to live in, but it makes better financial sense to go for the home improvements that also add value to your home and increase your equity.

Freeing up equity
However much equity you have in your home, there are ways to ‘free up’ that value without selling your property. Homeowners can potentially turn their equity into cash by remortgaging their home or securing a loan against it.

They might do this to finance a major project (improving their home, going to university, buying a new car, etc.). They might also do it to get their finances in order, lowering their monthly debt repayments by turning multiple high-interest debts like credit cards and overdrafts into one lower-interest debt – this is known as a debt consolidation remortgage/loan.

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