What is Equity and how to grow it.

March 14, 2017

 

The difference between the value of the property and the amount owed on the property is usually referred to as the “equity”. Equity will increase as the market value of your property increases and/or as the mortgage decreases when you make your scheduled payments.

 

Property investors hope that the value of their property will increase over time and with “principal and interest” loans, the outstanding loan amount decreases slightly as each repayment is made. When the property market is rising, the equity in property increases. Borrowers can potentially use this increased equity as a deposit to buy additional properties.  Conversely if the value of the property decreases, the equity in the property will also decrease. If the value of the property falls below the amount owed to the bank, this is known as “negative equity”. For recent purchasers in the UAE property market this is  rare as banks as the property market is currently low and since January 2013 UAE banks have required substantial deposits, typically more than 25%.

 

Historically in most major cities around the world, property prices double in value every 7 to 10 years. Creating wealth and building equity through property acquisition is in general considered safe and is the most popular form of investment worldwide.

 

The advantage that property as an asset class holds over other types of investment is the amount you can “leverage” which is traditionally much higher than shares. UAE Central Bank regulations stipulate a minimum down payment of 20% is required for UAE nationals and 25% for expats. Still this  allows UAE nationals to leverage their cash by 500% and 400% for expats. Leverage allows you to use the banks money to increase your wealth. For example placing a AED250K deposit (plus purchase costs of ~AED60K) on a AED1million property allows you to earn capital gains on the full value of the property (AED1Million). Most studios and 1 bedroom apartments in the UAE, if rented out, will cover the ongoing costs of the loan and property maintenance. If that property doubles in value in 10 years your effective return on investment is over 300% in 10 years.

 

Conversely that initial AED310K left in fixed interest bank account for 10 years earning 2% per annum will be worth just AED377,888.  This is a 26% return over 10 years.

 


 

Start building equity today. Calculate your mortgage payments here and get an indicative loan pre-approval within 24 hours.

Find your perfect property here on the UAE’s number one property portal: www.propertyfinder.ae.

 


Please note this information is intended to be used for general purposes only and does not consider your personal financial circumstances. Lenders will conduct a thorough investigation into your financial circumstances and only approved applicants will be able to obtain mortgage finance.


 

 

 

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