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What is equity?

Buying real estate is one of the most common ways people invest their money across the world. Why? Because the potential for return is huge. But to understand why buying properties is viewed as a good way to invest your money you need to understand equity.

A model house with a set of keys

Buying real estate is one of the most common ways people invest their money across the world. Why? Because the potential for return is huge. But to understand why buying properties is viewed as a good way to invest your money you need to understand equity.

Equity is the difference between the amount owed on the property, compared to the market value of the property. Equity can increase in two ways. Firstly, your equity increases slightly as you pay your monthly installments, decreasing the size of your mortgage. Secondly, if the market value of your property increases your equity also increases. But, if the market value decreases you lose equity. If the market value of the property is less than your mortgage your property will have negative equity.

When you sell your property or take out an equity loan, you release the equity in your property. Equity can also be used to invest in more properties, complete home improvements or renovations, or invest in other assets, through an equity home loan also called an equity release loan, where you borrow against your existing equity.

Why invest in real estate?

What makes investing in property advantageous is the ability to leverage the bank's money, not just your own. When you buy a property with a mortgage you pay the down payment up front and borrow the rest. For UAE nationals the down payment is normally 15% and 20% for non-nationals. When buying a property, you not only invest the 15-20% you pay up front but the entire cost of the property, potentially giving you a much larger and faster return on your investment than traditional stocks.

For example, if you purchased a property as a non-national, for 1 million AED you would pay 200,000 AED as your down payment. Despite investing 200,000 of your cash into the property you will still earn equity on the full 1 million price tag of the property. Essentially, you have a 1 million Dirham investment having spent only 200,000 AED.

Thinking about investing?

Thinking about buying a property in the UAE? Talk to our mortgage experts for advice on the best way to finance your property so you get the best return on your investment.


Written by Huspy Team

Published on 3 May 2023

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