For the sake of demonstrating how we make inflation work for you, let’s give an example: For the last 45 years, the median price of a house in Brisbane has averaged doubling every 8 yrs. E.g. In 1972, it was $15,000 & now is over $600,000. But for the sake of this explanation, we will work on prices doubling every 10 years.
How can prices keep doubling every 10 years?
Whilst the $ value might double & the real value stays much the same. What is happening is that with inflation, the value of your $ has halved, so you need twice the amount in 10yrs time. To put it simply, whilst the $ amount you borrowed does not move with inflation, what you purchased does – constantly creating equity.
An example in simplified form:
Ask yourself, if you bought a residential investment for $500,000, what would be 10% deposit? $50,000. That means you would borrow $450,000. That $50,000 is your equity. I.e. The difference between what the house is worth & what you owe the bank. Now, if in 10 years you paid $100,000 off your loan, how much would you owe the bank? If you said $350,000 you would be right! If in 10 years, the house is worth now $1,000,000 & you owe the bank $350,000, how much is your equity? Exactly! If you sold the house for $1,000,000 & paid the bank back $350,000, you would have $650,000!!
Effectively, you have turned $50,000 into $650,000 in ten years!
Now let’s look at how much is contributed in that time. Every client is different,
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so contribution will vary with income, tax bracket, interest rates, etc. But generally a contribution to pay off the loan is anywhere between $120 -$170 p/w.
Can I use equity in my current property for a new $50,000 deposit?
If you live in or around Emerald, this is quite possible. Local houses have passed the bottom of the ‘J curve’. You may expect to see houses start to rise in value.
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DISCLAIMER
Steve Taylor & Partners blog is opinion and not advice. Readers should seek their own professional advice on the above subject. The figures stated in this article were accurate at the time of publication. For up to date figures, please contact our office.
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