Equity is the share of a property owned outright, calculated as its current market value minus the outstanding mortgage balance. A 250,000 GBP home with a 150,000 GBP mortgage holds 100,000 GBP of equity, or 40% of the value.
In one line: Equity is the part of a property's value owned outright once the mortgage is subtracted.
How equity works
Equity grows two ways: through capital repayments that reduce the mortgage, and through rises in the property's market value. Both lower the loan to value ratio.
On a 200,000 GBP house with a 170,000 GBP mortgage, equity is 30,000 GBP. If the home rises to 230,000 GBP and the balance falls to 160,000 GBP, equity climbs to 70,000 GBP.
More equity widens access to lower mortgage rates and can be partly released through a remortgage, subject to affordability checks.
Equity vs negative equity
Equity is positive when the property is worth more than the mortgage. Negative equity is the reverse: the loan exceeds the property's value, leaving a shortfall on sale.
Falling house prices reduce equity even if the mortgage balance has not changed. Building equity faster by overpaying the mortgage, where the deal allows, also lowers the total interest paid across the term.
Primary source: FCA: Mortgages and home finance