Can You Use Equity as a Deposit for Your Next Property?
If you're selling your property in Wokingham, raising a deposit for your next home can feel like a hurdle. However, if you have built up equity in your current property, you might be considering whether it can be used as a deposit towards your dream home.
At Quarters Residential, we're often asked this question. The short answer is yes, in many cases, you can use equity as a deposit for your next property. However, how it works, what lenders require, and the risks involved are all important factors to understand before moving forward.
What Is Equity?
Before we look at whether you can use the equity in your existing home as a deposit on a new property, let's take a closer look at what equity actually means.
In simple terms, equity is the difference between your home's current market value and the amount you still owe to your mortgage lender.
Example Calculation
- Property value: £400,000
- Outstanding mortgage: £250,000
- Equity: £150,000
That £150,000 represents your financial stake in the property.
Equity typically builds in two ways:
You reduce your mortgage balance through monthly repayments
As you make regular mortgage payments, your outstanding balance decreases, increasing your equity stake in the property.
Your property increases in value due to market growth
When property prices rise, the gap between your home's value and your mortgage balance widens, building equity without additional payments.
Market Impact
Property prices across Berkshire and the wider South East have fluctuated in recent years, and market movements directly affect how much equity you hold. Data published by the Office for National Statistics regularly highlights how regional price shifts can influence homeowner equity levels.
How Can Equity Be Used as a Deposit?
When moving home, equity is usually released when your existing property is sold. The proceeds are used to repay your outstanding mortgage, and the remaining funds form your deposit for the next purchase.
However, equity can also be accessed without selling, typically through:
Remortgaging
Remortgaging means replacing your current mortgage with a new one, potentially borrowing more than you currently owe. The additional borrowing releases part of your equity as cash, which can then be used as a deposit.
Taking out a second charge (secured) loan
A second charge loan allows you to borrow against your property while keeping your existing mortgage in place. This can provide access to equity without remortgaging.
Lenders will assess:
- Your income and affordability
- Your credit profile
- Your existing financial commitments
- The loan-to-value (LTV) ratio
Understanding Loan-to-Value (LTV)
Loan-to-value is a key metric. It compares your total borrowing against the property's value.
Example: If your home is worth £400,000 and your total borrowing after remortgaging is £300,000, your LTV is 75%.
Generally, the lower your LTV, the wider your choice of mortgage products and the more competitive your interest rate. Many mainstream lenders, such as Tapton Capital, price their mortgage products according to LTV bands.
Regulatory Requirements
All residential mortgage lending in the UK is regulated by the Financial Conduct Authority, which requires lenders to carry out affordability and stress testing. This means they assess whether you could still afford repayments if interest rates rise.
What Is Negative Equity?
While many homeowners benefit from rising property values, it's important to understand the potential downside.
Negative equity is when the outstanding balance on your mortgage exceeds the current market value of your property. This situation can arise if property prices fall sharply after purchase.
Negative Equity Example
- Property value falls to: £230,000
- The mortgage balance remains: £250,000
In this case, you owe more than the property is worth.
If you have negative equity, remortgaging or moving home can become significantly more difficult, as lenders are unlikely to approve borrowing above acceptable LTV thresholds. This is why maintaining a sensible borrowing level and building an equity cushion is so important.
Do I Have Equity in My Home?
There is a straightforward formula to estimate your available equity, but you'll need up-to-date figures.
Establish your property's approximate market value
You can research recent comparable sales in Wokingham. Online property portals and local estate agents can provide valuable insights into current market values.
Check your most recent mortgage statement
Confirm your outstanding balance. If you don't have one to hand, your lender can provide a redemption figure.
Calculate your equity
Subtract the remaining mortgage balance from your estimated property value:
Property value - Outstanding mortgage = Equity
Important Considerations
Keep in mind that this figure represents gross equity. If you plan to remortgage to release funds, lenders will typically limit borrowing to around 75-85% LTV, depending on your circumstances. You'll also need to factor in potential early repayment charges, arrangement fees, valuation costs and legal fees.
Can Equity Be Used as a Buy-to-Let Property Deposit?
Yes, equity can also be used as a deposit on a buy-to-let property
Many homeowners choose to retain their current home and release equity to fund an investment purchase. However, buy-to-let lending works slightly differently from residential mortgages.
Typically:
- A minimum deposit of 15-25% is required
- Rental income must meet lender stress-testing criteria
- Interest rates may be higher than residential products
Buy-to-let lenders usually require projected rental income to cover between 125% and 145% of the mortgage interest, depending on your tax status. Landlords must also declare their rental income to HM Revenue & Customs and pay any income tax due.
Stamp Duty Considerations
Additionally, it's important to take Stamp Duty Land Tax (SDLT) into account. Purchasing an additional property in England usually attracts a higher rate surcharge, which must be included in your budgeting.
Releasing equity to fund a buy-to-let deposit increases your overall borrowing, so you must ensure that rental income comfortably supports the new financial commitment.
What Costs Should You Consider?
Using equity as a deposit isn't free. Whether you sell your home or remortgage, there may be associated costs, including:
Potential Costs
- Early repayment charges on your existing mortgage
- Mortgage arrangement fees
- Valuation fees
- Legal costs
- Broker fees
- Stamp Duty on your new purchase
Financial Planning Essential
Careful financial planning is essential. Increasing borrowing means higher monthly repayments and greater exposure to interest rate changes. Lenders will assess affordability not just at today's rates but under stressed scenarios to ensure resilience.
Is Using Equity as a Deposit the Right Move?
Key Considerations
Using equity as a deposit can be a powerful way to move up the property ladder or expand into buy-to-let investment without relying solely on cash savings.
However, it's important to balance opportunity with risk. Increasing your borrowing reduces your equity buffer and may raise your monthly outgoings. Market conditions, interest rates and long-term affordability should all be considered before making a decision.
At Quarters Residential, we always recommend seeking independent mortgage advice alongside estate agency guidance to ensure your plans are financially sustainable.
If you're considering selling your home in Wokingham or exploring how your equity could support your next move, contact our team today to arrange a valuation and discuss your options in confidence.
Frequently Asked Questions
Yes, you can. Many homeowners release equity by remortgaging or taking out a second charge loan rather than selling. However, lenders will assess affordability, credit history and your loan-to-value (LTV) ratio before approving additional borrowing.
There is no fixed amount, but most lenders prefer you to retain at least 15-25% equity in your home after borrowing. If your total borrowing exceeds 85% LTV, your mortgage options may become limited and interest rates may increase.
In most cases, yes. Borrowing more against your property increases your total mortgage balance, which usually leads to higher monthly repayments. Lenders regulated by the Financial Conduct Authority must ensure the new repayments remain affordable, even if interest rates rise.
Yes, provided you meet lender criteria. Buy-to-let mortgages typically require a 15-25% deposit, and lenders will assess expected rental income to ensure it meets stress-testing requirements. You must also declare rental profits to HM Revenue & Customs and account for Stamp Duty surcharges on additional properties.
Negative equity occurs when your mortgage balance exceeds your property's value. This can happen if house prices fall significantly. It may make remortgaging or moving home more difficult, especially if your loan-to-value ratio exceeds lender limits.
It can do. Increasing your borrowing raises your LTV, and higher LTV bands usually come with higher interest rates. Keeping your borrowing below 75% LTV often gives access to more competitive mortgage products.
Yes. Costs may include arrangement fees, valuation fees, legal fees, broker charges and possible early repayment penalties on your existing mortgage. It's important to calculate whether the long-term benefits outweigh these expenses.
Start by estimating your property's current market value in Wokingham and subtracting your outstanding mortgage balance. For an accurate figure, you may wish to arrange a professional valuation and request an up-to-date redemption statement from your lender.
Need Help Understanding How to Use Equity as a Deposit?
If you're considering using equity from your current property to fund your next purchase, Quarters Residential can help. Our specialist team provides expert guidance on equity release, remortgaging options, and property valuations in Wokingham. Contact us today to discuss your options in confidence.
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