Over the course of 2022, there’s been plenty written about rising interest rates and falling house prices. After a few years of booming prices, values have softened, and many borrowers have begun to get worried about carrying too much debt.
While not all debt is good, such as credit card debt, personal loans or even car loans, if you’re using debt to purchase high-quality assets, you can be confident that you are actually using the debt to benefit you in the long run. Unlike using debt to pay for your lifestyle or depreciating assets, property increases in value over time, and debt allows you to purchase superior assets that will grow quickly.
Many people still get nervous about taking on debt and are often worried about how they are supposed to pay down their mortgages if they ever want to own their properties. I tell these types of investors, that your goal should be to simply hold onto your properties and you don’t actually need to ever pay the debt down.
The reason for this is that over time property values rise. While there is no guarantee, the odds are high that if you purchase a high-quality blue chip asset, it can substantially increase in value. What that means is that over time, your property will go up in value, while the outstanding debt will simply stay the same. While your equity is increasing all the time, which is what you are actually trying to achieve.
One of the main reasons that assets continue to rise over time, is because of the way our monetary system works. Central banks effectively control the supply of money in the economy and over time they continue to expand it. Over the last few years, the money supply has exploded, in response to Covid lockdowns which in turn inflated asset prices quickly. While all this happened in a short space of time, the same thing has been going on for decades.
If you think about it, when there is more money in the economy, those dollars will continue to fight for the best assets, which in turn pushes their values higher. In recent years, we’ve seen a huge bull market in stocks, a crypto boom and of course record high property prices.
Because central banks continue to print money, you can be sure that the value of your fiat currency will keep on falling, while assets will keep rising. Hence why you want to be invested in real assets and the higher quality the better. That’s why we buy blue-chip assets, because we know that historically they are the ones that have seen the highest levels of capital growth, helped by money printing and of course natural growth in demand over time as populations increase and of course falling interest rates.
Now looking towards the debt situation. If you take on debt today to buy a property, then in 7-14 years’ time, when your asset has grown substantially in value, you will still only be paying back the same amount of debt, assuming you were on an interest-only loan over the duration.
This is why you never really need to pay down the debt. If you want to access the equity in the property you can refinance and cash out which saves tax, or you could sell the property. If you have multiple properties, you could sell down one to pay out another. The options are endless.
Governments like to print money because inflation is effectively reducing their debts as well. But it comes at the cost of the workers who save their money and don’t own real assets. While there are a lot of problems that come with the current fiat monetary system, the one way you can capitalise on it is by owning real assets.
If you buy blue-chip assets and hold onto them, over a long period of time you will be rewarded.
If you are in the market, and looking for a buyers agency to assist with your search, feel free to reach out today for a free discovery call!
