Leveraging is a commonly used term in the investment game that simply means borrowing money to finance an investment. Although people can be reluctant to borrow money as they see it as a risk, leveraging allows you to purchase more property than you could otherwise afford.
Here’s an example of how it works.
If an investor had $50,000 in cash to invest, they could safely put that in a term deposit earning 3% interest per year. This would mean that in one year the investor would earn $1500 ($50,000 x 3%). There is no risk involved and very little hassle.
There are more risks associated with investing in property but the financial rewards can also be greater. The same investor could use that $50,000 as a deposit for a $500,000 property; if the property value increased by 3% in one year, the investor would have earned $15,000 ($500,000 x 3%). If the increase in the value of the property was around a long-term capital growth average of 8% per annum, the investor would be $40,000 richer. That’s a pretty good gain!
Leveraging the equity in an existing property – whether a home or an investment – is also a great way to get ahead. The amount of equity you can release from a property depends on the value of that property growing while the size of the mortgage reduces or stays the same.
An example of how this works:
You buy a property for $400,000, putting down a 20 per cent deposit ($80,000) and borrowing the remaining 80 per cent ($320,000).
Over time, the property increases in value by $100,000. The 80 per cent mortgage would now only be 64 per cent of the property value – or less if you’re paying off the principal as well as the interest.
You refinance, increasing your mortgage up to 80 per cent of $500,000. You create a cash pool of $80,000, which can be used as a deposit to buy an investment property.
There are risks involved, and the main consideration is that you need to ensure you can service your debt. You also need to have a strategy and make sure you’ve done your research.
To find out how you could leverage your savings or equity to build a property portfolio, please contact me to arrange a time to discuss your plans.
Michael Luca
02 8217 9333
