The Power of Leverage

Leverage can be described as "using borrowed money to make more money than it costs to use borrowed money" and makes up one of Thrive's five key investment concepts.

Put simply, leverage is using the banks' money to make money for yourself. So, how can we achieve this?

Leverage comes from the ability to access borrowed money and this can be broken down into three key concepts:

1. Character

2. Security

3. Serviceability

Character

The vast majority of people have no problem meeting the character requirements because they pay their bills, do what they say they'll do, and act in good faith. The character test is run by the banks to qualify that the prospective purchaser will pay back the mortgage as the terms are agreed upon.

Security

For residential investment properties, security is all about having headroom between the value of your property and the maximum lending-to-value ratio. For your own home, you can borrow up to 80% of its value and for any existing properties, you can borrow up to 60% of the value.

Complications rise when you spread your borrowing across different lenders but if done right, this will allow you to access more capital without increasing the interest rate risk. Likewise, having a mix of growth and yielding properties allows you access to the optimal amount of leverage based on sufficient equity and serviceability.

It is also worth noting that banks will only secure your mortgage against quality assets that they believe they can sell to re-claim their money in the event the loan doesn't get paid. For instance, it's unlikely banks will accept a tiny house as security because its not fixed in one place and has no land therefore making it a risk security from the banks persepctive.

Serviceability

Quite often the main hurdle for investors, serviceability refers to your ability to service the mortgage you're trying to draw down.

Again, this is heavily influenced by the split between growth and yield properties. Choosing properties with strong cashflow even though the captial gains prospects are less rosy than other options can make sense because it enables you to increase scale. This trade-off is central to building a property portfolio.

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Equity is the difference between the value of your property and the mortgage outstanding. As the value of your properties grow, your equity does too and when its not being used, it is essentially dead money.

The power of leverage ultimately comes down to using 'dead money' in your properties to purchase assets that are expected to grow in value over time. Unless you do renovations or other fast-grwoth strategies, investors often need to do very little other than wait to build equity in their portfolio and therefore put themselves in a position to grow their portfolio.

When the properties you've purchased go up in value, you take all the gains.

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What do we do?

We help Kiwis build wealth through property investment. Our advisors will take the time to understand your individual needs and recommend suitable investment properties to help you build wealth and set up your retirement.

What does this look like?

We use a 3-step process:

1. We start with a Discovery Meeting where we learn about you, your goals, etc. and you learn more about us.
   

2. This is followed by a Strategy Meeting where we model your retirement plan, understand key investment concepts and briefly touch on some investment choices.
   

3. Finally, an Asset Selection Meeting where we discuss investment options in more detail and make any recommendation adjustments based on what we now know about you.

Who are we right for?

We help people with limited knowledge of the property market make smart investment choices and set up their futures. From first-time investors to experienced investors, we can cater to a wide range of people and help set up their futures through research-based property investment.

How much does it cost?

Nothing! We get paid a fee from the developer when a property is transacted so you are getting expert advice at no charge - it's a no-brainer!

How do I start?

Start the process now by booking a time to talk with our advisor by clicking here.