Let Leverage Make Money For You
Leverage means using someone else’s money to magnify your investment returns.
If you put down a $100,000 deposit and borrow $400,000 to buy a $500,000 property, you are gearing or leveraging your investment. If the property value grows by 6% p.a. for 5 years then it will be worth $669,112. If you now sell and repay the $400,000 loan, you’re left with $269,112. This means your $100,000 investment grew by about 21.9% p.a. That’s the power of leverage.
Of course we have ignored the rental income and a lot of expenses in this scenario but you get the idea. You only needed a 6% p.a. growth to get you nearly 22% p.a. (less expenses) on your own money. This is why so many Australians love property investment. Banks and other lenders love to give you a loan on property at what are pretty low interest rates. It’s a secure investment for the bank because the property they hold a mortgage over retains it’s value and is fairly easy to sell if things go wrong and it has to be sold to repay the loan.
The Loan to Valuation Ratio (LVR) dictates the amount of leverage you can achieve. Banks will often lend 80% of the property’s value but sometimes you can get a higher LVR loan. Your income needs to be sufficient too. The higher the loan ratio, the higher the leverage and the higher the return percentage on your own money (all things being equal). A high LVR loan (over 80%) will involve paying for Lender’s Mortgage Insurance which will make a high LVR loan more costly to obtain. Sometimes it may be your only option and you might decide it’s worth the extra cost to get into the market now rather than wait and save a bigger deposit.
Remember that leverage is a double edged sword so it will magnify a loss as well as a gain. That makes it all the more important to get yourself the right property with the right loan. Talk to us about structuring your investment correctly and finding the right property. That’s what we’re here for and we hope to be able to help you into a great investment as soon as you’re ready