How your mortgage can make you $1m

It takes courage and patience, but soaring property values can work in your favour

ANTHONY KEANE

Australia’s average mortgage size is now more than $624,000 – a debt many people would be uncomfortable about owing. Soaring property values have pushed up home loan sizes about $300,000 in the past decade, but those who learn to embrace mortgages can make serious money.

Yes, it’s a big scary number, but time turns big debts into manageable ones as inflation pushes up prices and reduces the relative size of loans.

Borrowers who control their fear and leverage their assets can turn a home loan into an extra million dollars or more. Here’s how.

Anyone who buys today then sits and services their home loan for about 15 years will most likely double the value of their assets, just by doing nothing. A median-priced property today should leave them $1m better off by 2040.

1. SIT ON IT

This term may mean something different to fans of Happy Days (sit on it, Fonzie!), but for real estate owners it’s simple: buy and hold makes money. Australia’s median house price does not double every decade, as used to be claimed, but its long-term growth is still superimpressive over time.

Between 2014 and 2024, the national capital city median house price rose from $605,000 to $929,000 – a gain of 53 per cent. In 2004, the median price was $391,000 and in the mid-1990s it was $160,000.

Those decade gains above 50 per cent show little sign of slowing as more people want to live in Australia, pushing up demand while we’re building fewer homes.

It suggests anyone who buys today then sits and services their home loan for about 15 years will most likely double the value of their assets, just by doing nothing.

A median-priced property today should leave them $1m better off by 2040.

2. LEVERAGE INTO PROPERTY

Real estate investors often cop criticism for owning more than one property, but if they don’t do it somebody else will – and does. In investment, the term “leverage” means using debt to amplify our financial returns.

Owning one $800,000 property that doubles in value delivers you $800,000 profit, but if you borrow money to buy a second $800,000 property and that doubles in value too, you make an extra $800,000 even if you don’t pay a cent extra off the investment loan. Real estate is easy to borrow money against because banks will put a mortgage over the property and be able to sell it if you default. You pay lower interest rates than for other types of investment lending or personal debt.

Property investors must be able to meet all repayments and other expenses even if their tenant defaults or leaves. And they must research an area’s growth potential.

3. LEVERAGE INTO OTHER ASSETS

It’s not just real estate that rises strongly in value over time.

Aussie shares have delivered good growth over many decades, they pay dividend income yields generally higher than property rents, and don’t have an annoying pile of main-tenance costs, insurance, council rates and other expenses that property investors have to pay.

US shares have done even better on the growth front, while another option for investors is to diversify through exchange traded funds across a wide variety of assets.

Business ownership is another form of leverage, where you use the power of staff to help build your profits while paying them to work for you.