11 Oct Mortgages – the quest for financial freedom – how to get other people’s money to work for you
If somebody stopped you on the street today and said, did you know that other people can finance your financial freedom? You’d probably think that they were just a little bit mad – after all there’s no such thing as free money, right?
Yet, one of the most important concepts to investors is the idea of leverage and while you can’t get people to give you money to invest in your future, you certainly can leverage your own money to borrow more money at favourable terms.
The Concept Of Leverage
As you probably know, a mortgage is a loan.
It is a loan that is usually offered at a preferential rate compared to say a credit card or a personal loan. That is because the lender has a form of security in the form of the property that you are borrowing money to buy. In order to get a mortgage, you need typically to have some money of your own to put down. In Australia’s sensitive mortgage markets that is usually around 20% of the total value of the property. The other 80% of the mortgaged property value is paid for by a loan.
How Does This Get Other People’s Money To Work For You?
For most of us, it would take a very, very long time to save up 100% of a property’s value to buy it outright. This would make property investment something that only the very wealthy elite could afford to do. A mortgage, however, places property investment within the reach of most working people.
You borrow somebody else’s money (in this case it’s usually the bank’s money or the financial institution’s money) to buy the investment property. Then you rent out the property. The rental income on that property should cover the mortgage payment and in some cases it may even exceed the value of the mortgage payment. That is somebody else works to pay off your loan. Not only does the bank’s money work for you but somebody else’s money works to repay the bank.
What Does That Mean In Terms Of Financial Freedom?
Leveraging your deposit to get a mortgage brings in three possible areas of return:
This is not likely in the early years of a mortgage where rental payments and mortgage payments tend to be similar but as the years go by – there is often a point where the mortgage payment falls behind the market rental value of a property. This then becomes income for you.
Australia offers tax breaks on interest payments on mortgages. This is another form of income.
Finally, based on past performance there is an expectation that the value of property increases over time. When you sell the property any equity gain is also income for you. Property investment leads to financial freedom by providing income that you do not have to directly work for. There is, in theory, no limit to the number of properties you can own and rent out. The more you have, the more money you have coming in.
Want to start investing in property and need a mortgage?
Then call us at Aspirus Financial Services and we’ll help you find a suitable mortgage for your needs.