Last edited 04 Jul 2018

Equity in property

Equity in finance is a measure of the ownership of assets in the form of stock, bonds or cash sometimes called a 'shareholding'.

In the context of residential property it is a measure of the difference between the market value of a property minus what the owner still has to pay on the mortgage. There are many variables but generally over a specified period (often 25 years) the equity in the property is gradually transferred from the lender to the owner.

Market value can fall in the early stages after purchase. In extreme cases this can result in the owner having negative equity and the lender foreclosing the mortgage arrangements and repossessing the property. The lender can then sell the property to recover the loan and retain the owner’s deposit if there is a shortfall.

Equity in property development investment is similar, following the notion of redemption when the share is valued as the difference between the market price of the property and the amount of any mortgage or other encumbrances. If the asset value of the entity exceeds all its liabilities, including initial equity capital, there will be a capital gain for the investors.

In the case of insolvency, lenders of loan capital with charges on a property are the first to be compensated, then other creditors are paid and equity holders are last in the queue.

Equity percentages of ownership can be diluted when further equity investors are introduced to increase funding or options are introduced to encourage ownership and incentivise senior management.