Property is viewed as excellent security, and as a result banks will lend investors money to purchase a property investment. You do not need to find 100% of the property value as an investment. You only need to find a proportion of the value in order to be able to purchase. However, although you invest just a portion of the funds you will actually receive capital growth on 100% of the asset.

Imagine you own a buy to let property portfolio with a value of £500,000. You will put down a deposit (say 20%) and you borrow the balance (£400,000) from the bank.

Typically since the War house prices have doubled every 9 years. If you assume this trend continues, then after 9 years your property value would have increased to £1 million. If you had an interest only mortgage your loan would still be £400,000. Your initial net worth (assets less debt) was £100,000, but 9 years later your net worth has increased to £600,000. Your net worth has increased by 6 times even though the value of the property has only doubled.

This is because you get 100% of the benefit of the increase in value. You put down only a percentage of the property value and borrowed the rest. However, the lender does not ask for a share of the increase, even though they financed a huge chunk of the property purchase.

This entry was posted on Wednesday, March 11th, 2009 at 10:43 am and is filed under finance general, property market general, property prices. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.