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Equity

Also known as: Property Equity, Home Equity

Definition

Equity is the portion of your property that you own outright, calculated by subtracting your outstanding mortgage and secured loans from your property's current market value.

For most UK homeowners, property equity represents their largest asset and forms a significant part of their estate, making it crucial to understand when creating a will or planning inheritance.

What Does Equity Mean?

Equity is your financial ownership stake in your property—the difference between what your home is worth today and what you still owe on it. The calculation is straightforward: take your property's current market value and subtract your outstanding mortgage balance and any secured loans. If your house is worth £300,000 and you owe £200,000 on your mortgage, your equity is £100,000. This £100,000 represents what you truly own, free from debt obligations.

This concept, rooted in the Law of Property Act 1925's distinction between legal and equitable interests in property, has practical implications far beyond legal theory. Your equity grows in two ways: through mortgage payments that reduce what you owe, and through property appreciation that increases what your home is worth. When Sarah bought her Manchester home in 2019 for £250,000 with a £225,000 mortgage, she had £25,000 equity from her deposit. After five years of payments reducing her balance to £205,000, and her property increasing in value to £280,000, her equity grew to £75,000—a combination of £20,000 in mortgage repayments and £30,000 in property appreciation.

Equity can also decrease, creating situations many homeowners find stressful. If property values fall significantly, you can end up owing more than your home is worth—called negative equity. Emma bought a London flat at the 2022 market peak for £320,000 with a 5% deposit (£16,000) and a £304,000 mortgage. When property values in her area fell 12% by 2024, her flat became worth approximately £281,600, but she still owed £298,000. This negative equity of -£16,400 means she owes more than the property is worth, affecting her financial planning and estate considerations.

For estate planning purposes, understanding equity matters because beneficiaries inherit your ownership stake, not the property's full value. David owns a main residence worth £400,000 with a £100,000 mortgage (£300,000 equity) and two buy-to-let properties: one worth £200,000 with a £150,000 mortgage (£50,000 equity), and another worth £180,000 with a £90,000 mortgage (£90,000 equity). His total property equity is £440,000—significantly less than the £780,000 total property value. When creating his will, David realized he couldn't simply give one child the main residence and the other the two buy-to-lets, as the equity values don't match. This understanding helps ensure fair distribution among beneficiaries.

Common Questions

"How do I calculate the equity in my home?"

Calculate equity by subtracting what you owe on your mortgage (and any secured loans) from your property's current market value. For example, if your home is worth £300,000 and you owe £200,000 on your mortgage, your equity is £100,000—the portion you truly own outright.

"Does equity in my property form part of my estate when I die?"

Yes, your property equity forms part of your estate and passes according to your will (or intestacy rules if you have no will). The full property value is included in your estate, even if there's an outstanding mortgage—your executors will settle the mortgage from estate funds or property sale proceeds.

"Can my equity increase or decrease over time?"

Yes, equity changes in two ways: it increases as you pay down your mortgage and when property prices rise. It can decrease if property values fall (potentially creating negative equity where you owe more than the property is worth) or if you borrow against it through remortgaging or equity release.

Common Misconceptions

Myth: My property value and my equity are the same thing.

Reality: Property value is what your home is worth on the market; equity is only the portion you own after subtracting mortgages and secured loans. If your £300,000 home has a £200,000 mortgage, your equity is £100,000, not £300,000. Many people overestimate their actual ownership stake by confusing these terms.

Myth: I can't access my equity until I sell my property or die.

Reality: You can access equity during your lifetime through remortgaging (borrowing more against increased value) or, if you're over 55, through equity release schemes. However, borrowing against equity reduces what you own outright and may impact inheritance for beneficiaries. Equity is a financial resource you can use while alive, not just an inheritance asset.

  • Mortgage: The debt secured against your property that reduces your equity—as mortgage decreases through payments, equity increases assuming stable property values.
  • Equity Release: A financial product for homeowners aged 55+ that converts property equity into cash, reducing the ownership stake you can leave to beneficiaries.
  • Main Residence: Where most homeowners hold their largest equity stake and where the residence nil-rate band applies for inheritance tax purposes.
  • Buy-to-Let Property: Investment properties that contain equity forming part of your estate, often with higher mortgage-to-value ratios than main residences.
  • Property Value: The total market worth of your property—equity is only the portion of this value you own after subtracting debts.

Need Help with Your Will?

Understanding property equity is essential when creating your will—it helps you accurately assess your estate value and plan fair distribution to beneficiaries. Many people overestimate their estate by confusing property value with actual equity, leading to unrealistic inheritance expectations.

Create your will with confidence using WUHLD's guided platform. For just £99.99, you'll get your complete, legally binding will plus three expert guides. Preview your will free before paying anything—no credit card required.

Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.