Don’t take out a big mortgage (unless you’re comfortable with these 3 things)

Leveraged investments have higher risks. In other words, the value of your equity goes up and down way more than if you didn’t take on any debt. 

So before you take on that big mortgage, you’ve got to be comfortable with these three things:

#1 Big mortgages make your returns more up and down

While a big mortgage magnifies your gains and your losses it also makes the potential outcomes wider.

So if you could buy a $500k property all with cash (no mortgage), you have no Mortgage Magnifier. You get the market return and therefore the return you can expect to get per year is pretty stable.

Your expected gain would likely fall somewhere within a bell curve. 

But buy that same property with a lot of debt, and the Mortgage Magnifier kicks in. 

That makes your potential returns more extreme, so your expected return each year is less certain. 

In other words, your equity will bounce around a lot more.

Again, over the long term you’ll likely make much, much more money, but you’ve got to be comfortable with more of those ups and downs.

#2 You need to own property for longer if you have a big mortgage

Investors and financial advisers often talk about minimum investment horizons. 

The more risky the investment, the longer you want to hold it for. 

For instance, you might want to be in a: 

• conservative fund for at least 3 years
• balanced fund for at least 5 years
• a growth fund for at least 7 years

Property is a riskier asset (they go up and down in value more). 

So you often want to be prepared to hold it for at least 7 years. 

But add in the leverage aspect, and your wealth will go up and down even more. 

So because there are more ups and downs (more risk), you really should be prepared to hold it for longer.

Here at Opes, we often recommend being prepared to hold the investment for at least 10-15 years.

If you can do that you’re more likely to make money through property. If you have a short-term focus, leveraged property is probably not for you.

#3 If you sell quickly you could lose a lot of money

Generally, people who hold on to their properties for longer make money. But, if you sell quickly, you could lose money. A lot of money. 

In the last quarter of 2024 CoreLogic divided property sellers into 2 groups:

In one group are those who sold their properties for more than they bought them for. In other words, they made money from property. 

On the other are those who lost money from property. They sold their houses for less than they bought them for. 

91% of sellers made money. On average they made $289,500 in profit and they’d owned their properties for 9 years. 

9% of sellers lost money. They lost an average of $55,000 and they only owned their properties for an average of 3 years.

What does this story tell us? People who panic sell tend to lose money. Those who stay in property for the long term tend to make money.

Should I hold for the long term?

In theory, holding a property sounds easy. In practice, it’s much harder. Debt isn’t just a financial burden; it’s a psychological one too.

A big mortgage doesn’t just magnify returns (and losses) – it can magnify your stress and anxiety too.

That’s why you need to have a long-term approach if you invest in property. And you need to have an even longer-term approach if you use a big mortgage too.