Equity build up is the increase in the net ownership value of a property that is achieved by the gradual reduction of the mortgage loan principal that was used for financing its acquisition by the investor.
The gradual reduction of the mortgage loan principal is achieved by the periodic payments made by the borrower. It should be noted though that according to typical mortgage amortization schedules for long-term loans, the reduction of the loan principal owed, and therefore the increase of the investor’s equity in the property, is very slow in the first 10-15 years. Of course for shorter-term loans where the rate of principal repayment is faster equity build up is faster as well.
Equity build up is a very important component of the benefits offered by leveraged property investments, that is, investments partially financed through borrowed funds. Such benefits are exaggerated when the value of the property increases at a fast pace as the loan is repaid