How to turn your home loan into a money making machine.
Most of us are generally grow up with the belief that debt is bad. We tend to focus on a single financial strategy of paying off our home before we will consider starting a wealth creation plan.
The problem with this approach is that other events occur along the way that defer us paying off our home - holidays, school fees, renovations - and before we know it 10 years have passed and our debt has not really changed. So our investment plans continue to be deferred.
What many people do not understand is that rather than being a barrier; debt can actually move you more quickly towards your wealth creation goals, including paying off your home.
This can be achieved through understanding and utilizing the power of leverage. Leverage allows you to acquire a much higher value asset than you would otherwise be able to acquire using just your own resources.
Leverage is generally measured as a percentage, based on the amount you borrow against the value of the asset. For example lets' assume you purchase a property for $400,000. You put in $40,000 of your own cash and borrow $360,000. Your leverage would be 90%.
The real power with leverage comes from understanding that the higher your level of leverage the greater the potential return you achieve on your cash.
Let's look at a simple example to illustrate. Three brothers are left an inheritance from their uncle. Each receives $40000. Here's what they did:
Brother 1 pays down his home loan. Assuming a home loan rate of 6.5% he has improved his cashflow by $270/month or $3240 per year.
Brother 2 decides to tip his $40,000 into super returning 7.2% per annum on average.
Brother 3 uses his funds as a deposit on a new $400,000 investment property with an expected annual capital growth of 7.2% pa on average.
Let's see what happened.
After 10 years Brother 3 has turned his $40,000 into an additional $400,000. ($800,000 less deposit $40,000 less loan $360,000 = $400,000). If he wanted to he could sell the property and probably clear his home loan altogether. But why would you if you believed it was going to double in value again in the next 10 years?
While Brother 1 had the right intention in paying down his personal debt what he should have also considered was redrawing that equity for investment purposes. In that situation he could have financed 100% of the investment purchase which would all be tax deductible.
The point to note here is that just paying off the home loan is not really an effective strategy. Because time doesn't stand still. There's a good chance that the investment property you can but today for $350,000 will be $700,000 in 10 years time.
The best time to plant a tree was 20 years ago. The second best time is today.
Are you interested in?
If you are then you should apply for MTA's Property Plus programme.
Property Plus is MTA's Premium Wealth Creation service specifically designed to provide you with a structured, systematic and managed approach to building an investment property portfolio. Our approach is underpinned by sound budgeting processes and safeguards, and is supported by an experienced team of professionals to ensure that wealth created is sustainable and protected.
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The information provided is general in nature only and is not a substitute for independent professional advice. We disclaim liability to all persons or organisations in relation to any action(s) taken on the basis of this information, or any loss or damage suffered in connection with that information or material. You should make your own enquiries before entering into any transaction on the basis of this information.