On an emotional level, we want a place we can call 'home'. We want somewhere that we can paint the walls any colour we like, and somewhere we don't have to fear the dreaded 'Landlord selling up...' letter arriving in the letterbox.

But on a financial level, our love affair with property is all about leverage. So what does this mean?

'The use of a small initial investment, credit, or borrowed funds to gain a very high return in relation to one's investment, to control a much larger investment, or to reduce one's own liability for any loss.'

Example:

A property worth $250,000 - you can put in 5% ($12,500) and borrow 95% ($237,500).

If the property market goes up 5% in one year, the value of the house would be $262,500, an increase of $12,500.

Therefore, the return is the same as your initial investment.

Let us look at a comparison - saving money in a bank versus using leverage to purchase a property.

Savings $12,500 at a return of 8% in the bank over 10 years and compounding your investment would be worth $27,000. This is an increase of $14,500.

If the same $12,500 were invested in property worth $250,000, (borrowed $237,500) at a rate of 5% the value in 10 years would be $407,200. Less the loan of $237,500 the increase would be $157,200* (used below)

My parents always said to me, 'buy a property - if anything it is a compulsory savings scheme!' and they were right.

A look into the future...

For those of you who are property owners, or who really do understand leveraging - where can this take you?

I have client interviews daily - and one common question I am asked is: 'How can I pay my mortgage off faster?'

There is no one answer to this - but it can incorporate setting up the right mortgage structure that suits your needs, to managing your flow of money better allowing for extra repayments, and using leveraging to its full advantage.

Let's compare...

Assuming you get a $237,500 loan over a 30 year term at 9% interest rate - in 10 years you would have paid $228,580 in interest and only $21,520 in principal - which means the loan balance would still be $216,000 (A)

If you could pay extra repayments of $100 per week, you would have paid $174,800 in interest, $102,000 in principal - which means a loan balance would still be $135,000.

If you used leverage and invested in a further rental you know from the example above that in ten years the profit would be $157,000*. (B)

If you sold the rental and put the profit onto your mortgage, assuming you only paid the minimum payment on your home loan throughout this time, the balance would be only $59,000 (A - B)

Is it that easy?

NO - not everyone should take on more debt and invest, and you should seek professional advice and research your decision, BUT for many, investing in property and using the art of leverage is allowing them to create wealth that they just would not be able to otherwise achieve.

For further information please contact your advisor at Connect Mortgages.

For further information please contact Connect Mortgages on:

1. 0508 more than mortgages

2. (09) 337 11 11

3. This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

4. www.connectmortgages.co.nz

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