I wouldn’t say that in order to be a successful property investor you need to rush off and remortgage your home or your existing property investments but let’s look at the arguments for and against doing so.
The first argument against is that you shouldn’t spend your capital. But in a sense you’re not really spending it. If you spent it on a wasting asset, like a car or a boat, then it would eventually disappear. But really we are just moving our equity from one place to another, dividing it up between our home and our new purchases.
The second argument against is that if the property market crashed then you would lose all your equity and would still have a massive mortgage to pay on your own home.
However, we’ve already addressed that in part, by recognising that future purchases will be bought at bargain prices so we have a buffer against future falls. I recognise that does not protect our existing home which could, theoretically, go into negative equity but again, we’ve assumed an 80% loan to value on our remortgage so we have a 20% buffer already built-in.
And the reality is that even under the bleakest of circumstances we would only lose everything if we sold. So unless we have to, we won’t sell. What will eventually happen? The market will recover. It always does. It’s cyclical and it will eventually end up higher than it was before prices fell. I can’t prove the market will always recover, but history suggests it does at some point and I can see no good reason to assume things will change. If we wait long enough our negative equity will disappear.
Finally, some would argue that if you are geared to the hilt then you are at risk if interest rates rise. Again, I would hope that we would try to read the signs. If it’s obvious that interest rates are likely to rise significantly, which some time over the next few years is likely, then surely you would draw-up your plans accordingly. Investors can look out the best fixed rate mortgages or capped rates to bring certainty. Or you could postpone your refinancing altogether.
Where the picture is less clear about what will happen in the future then I’d suggest doing a “sensitivity analysis” and calculate what would happen to your cash flow in the event of interest rates reaching certain levels (see my earlier post Due Diligence Part 7). You can then calculate at what point you go from positive cash flow into negative cash flow, and assess the risk of interest rates reaching those levels at some point in the future. Then you could decide exactly how much you feel comfortable about drawing out now.
So I hope you can see that, as a general principle, many investors are sitting on a gold mine by not using their existing equity.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor