Since the day dot, most of us (or certainly those of my generation) were brought up to believe that one of the key objectives of adult life is to pay off your mortgage on your home. At least this way, you’ll have a roof over your head or something tangible to fall back on if you hit financial turbulence.
There is undoubtedly a sense of security that comes with having no mortgage on the house that you live in and it is a very sensible goal for retirement.
However, the downside is that it means a significant amount of capital, and probably your net worth, is being used in a very unproductive manner. It’s not generating any income or revenue, earning zero interest as a totally sterile asset and basically, not working for you at all.
If you have owned your home for many years, then it’s highly likely that you’ve got a mortgage that either represents a very small percentage of the value of your property, or you have no mortgage at all.
If you’ve ever considered investing in property, whether that’s to supplement or replace your income, or generate a boost to your pension income, then the equity in your home is the single biggest opportunity for many people to raise the finances to get started.
Releasing a percentage of the value of your property can provide the funding to use on other more productive investments.
Now here comes the “but”. Nobody is suggesting (and if they are, don’t listen) that it’s a good idea to attempt to release as much equity as possible from your existing property to fund a more extravagant lifestyle. Nor should you put this money into other investments where there is either a medium or high degree of risk, or where you have little knowledge or experience – and this includes property.
However, if you’re taking money out to invest in property that will generate much more income than the cost of borrowing, then that is what is referred to as ‘good debt’ - debt that works to produce an income over and above the cost of borrowing.
It is generally possible to release capital from existing property at a cost of between 3.5% and 5%. If that same capital can be put to work in a relatively safe way and generate a return of, let’s say, 15% or more (as is the case with a PPP property business), then for every £100,000 reinvested, you could be making an additional £10,000 extra annual income. And this is a strategy that 200 other intelligent, like-minded and professional people are doing right now.
If you take a standard buy-to-let (BTL) investment model where 75% of the BTL property is mortgaged, you have to find 25% for the deposit and some legal fees and then any refurbishment of the property that you do. Done properly, and there’s a huge focus on this phrase “done properly”, BTL investment can be a very secure, low-risk investment and a great way to generate both income and capital growth.
All the evidence says that over the longer term, property is a good investment, but the key issue to really improve both the returns and reduce the risk of property investment is to ensure that you’re getting a high level of income, with the potential of capital growth as an added bonus. And that’s the trickiest thing to achieve and is where professional expertise and a tried, tested and proven system can add most value.
Releasing equity, if you have it, can be a great way of giving you financial options and choices that may otherwise not be open to you.
For more information about how PPP could help you reinvest your equity to maximise its potential, please contact us.
