Mortgage debt amplifies the impact of property price movements, meaning that if a property increases in value by 10% for instance, investors' capital gains will be a higher % of their equity investment (20% in the illustrative example above). Equally, if a property falls in value by 10%, investors' capital losses will be a higher % of their equity investment.
The amplification effect is similar in the context of rental yields. If the ungeared net yield of a property is higher than the cost of debt (after tax), the mortgage will increase the income yield of the property and if the ungeared net yield of a property is lower than the cost of debt (after tax), the mortgage will decrease the income yield of the property.
Investors are exposed to the risk of interest rate rises. Mortgage interest has priority over dividend payments to investors. Significant increases in the costs of borrowing could make refinancing or existing interest uneconomical, potentially leading to a forced sale and a risk to the money you have invested.
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