Compound interest

Compound interest is interest calculated on both the original principal and the interest already accumulated, so growth accelerates over time.

Why it matters to property investors

It works in two directions, and both are large:

Against you — on debt, interest compounds. It is why the early years of a mortgage are so interest-heavy and why extra payments early have outsized effect.

For you — property returns compound. A property growing at 5% annually does not grow by 5% of the original value each year; it grows by 5% of the ever-larger value. Over 20 years the difference between simple and compound growth is dramatic.

The leverage effect

Property is unusual because you compound the growth on the whole asset while having contributed only part of the price. A 20% deposit on a property growing at 5% produces a much larger return on the capital you actually invested — and works equally powerfully in reverse when values fall.

Common misunderstanding

Compounding needs time to matter. Most of the effect is in the later years. It is the mathematical argument for long holds, and against strategies that repeatedly reset the clock.

Related terms

Last reviewed: 1 August 2026 · General information only, not financial advice.

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