Equity
Equity is a measure of how value owners have in a property, after repayment of any loans secured against it. It is calculated by the following formula.Equity = (Property Price) – (amount outstanding on loans secured against the property)
Greater equity makes it easier to obtain finance at lower rates. Equity can increase in one of two ways either by repaying the original loans or by rises in houses prices. In the example house prices increase to £150,000. This is especially useful to the owners as they initially only invested £20,000 in the property but could obtain £70,000 if they sold.
Negative Equity
Negative Equity occurs when the amount of debt outstanding is greater than the value of the property. A mortgage holder has to agree to release their hold over the property when it is sold, normally this is not a problem where there is positive equity in the property as they are repaid from the proceeds of the sale and agree to the sale on the basis that this happens. However when a property is in negative equity the mortgage company may not agree to the sale. Negative equity can therefore prevent the owner from moving.
Negative equity is not only bad for the owners, it can also be bad for the banks/building societies who loaned the money. This is because they may face loses when home owners stop paying.
Loan-to-Value
LTV= (Amount of loan secured against the property)/(Property Price)
This is related to the Equity and is a measure of the risk a lender is making. In the event of a borrowing being unable to make payments to a loan lenders rely on the sale of the underlying property to repay the loan. The more the value of the loan as a percentage of the property price the greater the risk the lender will not be repaid. Generally the higher the Loan to Value the cheaper a mortgage will be.
Sometime mortgage offers are based on the precentage deposit that a borrower has. The formulas for that is displayed as:-
% Deposit = 100% - LTV
0 comments:
Post a Comment