Equity

Equity is the portion of an asset’s value that the owner holds free and clear of debt. It is calculated by subtracting any outstanding loan balance from the asset’s current market value.

Formula

Equity = Current Market Value − Outstanding Debt

Example

A property purchased for $600,000 with a $480,000 loan starts with $120,000 of equity (a 20% equity position). After five years of repayments and capital growth, the property might be worth $700,000 with a loan balance of $440,000 — producing $260,000 of equity.

How equity grows

Equity increases through two mechanisms:

1. Principal repayment — each scheduled loan payment reduces the outstanding debt
2. Capital growth — appreciation in the asset’s market value adds to equity without any payment from the owner

Why equity matters

• Borrowing capacity — lenders use equity as security for additional borrowing, often through a redraw, line of credit, or refinance
• Net worth contribution — equity in real assets is typically one of the largest components of household net worth
• Risk position — higher equity (lower LVR) reduces the risk of negative equity if asset values fall
• Sale proceeds — equity is what the owner walks away with after settling the debt on sale

Building equity is a core long-term strategy for property owners and investors alike.