Explaining ‘Equity’ in Property

Explaining ‘Equity’ in Property

At Sterling First Gold Coast, you may hear us occasionally use the term “equity” in the context of an existing property.

Let’s just briefly explain what that means and more importantly, just how you might be able to use it to your advantage.

Property debts versus property valuation

The vast majority of people that purchase property do so with the assistance of some form of loan.  The most familiar form of that is, of course, the mortgage.

As we go through our lives, typically the amount of money we owe on our mortgage declines and even allowing for the occasional blip in the marketplace, the valuation of our property increases.

During this typical life cycle, we might also take out loans that are secured against the property.  That might sometimes be for the purposes of starting a business or purchasing another asset etc.

Over the course of many years though, overall the amount of money that we owe that is secured against our property, should decline at the same time as our property’s value increases.

To put it another way, our debts go down and the potential net value we have in the property goes up.

An example

Let’s assume that a property has a realistic market value of $200,000.

Let’s further assume that over many years, the mortgage has been paid and there is now only $20,000 of that debt left.

Perhaps a few years ago, a loan was taken out to build a swimming pool and secured against the property.  That has also been paid off over time and now only $5,000 of it remains outstanding.

Adding the $20,000 mortgage debt to the residual $5,000 swimming pool loan, means that the total debts against the property are $25,000.

Subtract that from its realistic market value of $200,000, and we’re left with a figure suggesting that the property is worth $175,000 more than all the debt secured against it.

That $175,000 is called the “equity” in a property.

Purposes

If you decide to sell your house in order to secure more suitable accommodation for your more senior years, that equity calculation will play an important role in helping you decide how much you can invest in changing your lifestyle.

Why not contact us to find out more about our property propositions and how the equity you have in your existing property might be able to help you to establish a relaxed and stress-free accommodation position as you go forward into your third age?