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One of the biggest reasons for property’s gain in popularity as
an investment over the past few years has been the ability to leverage
the purchase by accessing mortgage finance.
“This has of course been much more difficult to do over the past
two years because of the economic downturn and ensuing consumer credit
crunch,” says Martin Shultheiss, CEO of Harcourts Africa, “but
the power of gearing has remained attractive and is currently even more
so because interest rates are at such a low level.
“The fact is that a mortgage remains one of the best wealth creation
tools available to the general public, because it enables you to buy a
property worth far more than most people could afford using just their
own money – and to keep the profits on both the bank’s money
and your own when you resell.”
This is certainly not the case, he points out, when consumers invest
in shares, for example, “or even if you keep your money in a savings
account. The only profit you make then is the dividend or interest on
the money you put in yourself.”
Gearing goes to work, Schultheiss explains, when you buy a property using
your own funds for the deposit and a home loan to cover the rest of the
purchase price. “Say you pay a 10% deposit for a house costing R500
000 – or R50 000 - and borrow the other R450 000.
“When property prices rise by 10% and you decide to sell the house
for R550 000, you will be left with a R50 000 profit on the sale after
you’ve repaid your home loan. And you will not owe any of that profit
to the bank, which means that you will have doubled your own initial investment
of R50 000.
“There are not many other ways for ordinary investors to do that
within a relatively short period.”
Alternatively, he says, it is often possible for homeowners to leverage
the increase in their property’s value to finance other things, such
as education or the purchase of a second property to create even more
wealth. “And once again, you will be benefiting from the increase
on the total value of the property, not just the deposit you paid.”
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Newsletter:
3 February 2012 to 10 February 2012 - Krugersdorp, Gauteng, South Africa
