Using Your Banks Money To Grow Your Own

You’ve just bought your house in Spain and because you got such a good deal you now find you have money in the bank. It isn’t a huge amount but with your pension taking care of daily business you decide you want to invest the money. Lets say you have $20,000 to invest.

How do you get the best returns on your money?

Clearly you could put it into a high risk fund and hope for the best. A good fund will give you a return of about 15-20%.

But what if you could get a similar return by investing in safe government bonds at a mere 5% return. Impossible I hear you cry because the very nature of these bonds means you will be lucky to get 5%. And you may be right.

So let me introduce you to the concept of gearing. It is a concept you will be familiar with even if you don’t fully understand it.

When you buy a house for say $100,000 and have $20,000 to put down – you take a mortgage for $80,000. Your property sells three years later for $150,000, which means your $20,000 has turned into $70,000 – a return of 250% on this $20,000 investment or around about 52% compound annual interest.

This is what is called gearing. You have used the banks money to increase the value of property you could buy. 3 years later when you sell your property it has increased in value substantially more.

Now had you bought a property worth $20,000 and paid outright for it, then your property (assuming the same sort of growth) would have been worth $30,000 – a mere 14.8% annual interest or thereabouts.

So how do you apply this to bonds and get similar returns? Very simply – you find a bank – your own for example that will raise a mortgage on your house for the investment. Say you have $20,000 to invest, you get a mortgage of say $80,000 (for the sake of argument and ease of calculation) giving a total of $100,000.

Now we invest this into a bond that gives a steady 5% per annum. Lets see what that does for us.

Note table 1 assumes the mortgage is paid for separately from the fund. If the fund pays the mortgage then table 2 is the more accurate return.

In order to see the rest of this article – including the table of returns go to
[http://www.spanishproperty-direct.co.uk/article_finance1.htm]

For more information about buying in Spain and how to avoid paying too much for your property – check out [http://www.spanishproperty-direct.co.uk/book.htm]. For other interesting articles on buying a property in Spain visit the website http://www.spanishproperty-direct.co.uk – you can even get a free Course of Spanish Lessons.

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