As our equity increases, we’ll be even better off. This is because, as active investors, as the equity in each of the investment properties increases, we would have the option to refinance and buy yet more properties meaning we’d have far more equity than the £1.11m. But I think you get the point.
Now, for those who doubt that house price inflation will catch-up with the long-term trend over the next decade, please feel free to input whatever growth figures you feel comfortable with. Whatever rate of growth you use, the basic premise must be that, all other things being equal, we will still be better off if we put our equity to work.
That assumes, of course, that you input a positive rate but what if you think prices may stagnate or even fall over the next decade?
It would be ridiculous to try and cover every permutation in this article so let me address that point by highlighting some broad principles.
First, we’d need to decide if we were going to use our newly released equity to buy a property for cash or whether we are going to use it as deposits and gear it up by taking out more finance.
Either way, we can buffer ourselves against future falls in the market by buying at a large discount or, as we now call it, buying BMV (below market value). If the market doesn’t fall by as much as we discount, then we will already have a built-in positive return.
If we buy for cash we can use the rent received from our property investment(s) to pay the extra interest we are now paying on the mortgage on our own home, following refinancing and, if we have done our sums right, should be paying down that extra element of the mortgage as well.
Alternatively, if we decide to gear up and take out more finance, we could change tactic and use a capital repayment loan on our investment property and pay down the extra finance we’ve taken out against the investment property. Even if prices stagnate, or even fall a little, our total equity is still increasing as the mortgages are paid down
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor