ANALYSIS: Getting a big mortgage seems great at the start. You get the house you want without having to save all the money you’d need to buy it outright.
But apart from the crippling weight of having to repay a large sum of money to your lender of choice, your home loan has another dark side - one that can either make you a fortune, or wipe out your wealth.
Investors and economists often talk about leverage. It’s the amount of debt you have compared to what your house is worth. This leverage is a double-edged sword. Because the more debt you have, the more risky the housing market is. Essentially, a big mortgage is a magnifying glass on the property market.
Let’s say you buy a $1 million house with a 20% deposit ($200,000). You now owe 80% of the purchase price ($800,000) to a lender, plus whatever they charge in interest.
Start your property search
On the plus side, if property prices go up by 10%, your property is now worth $1.1m and you’ve made $100,000 – on paper. Your equity in the property will also rise, from $200,000 to $300,000, which is a 50% gain on your deposit. So, that big mortgage (the leverage) amplified your gain by five.
Discover more:
- Ed McKnight: Do NZ house prices really double every 10 years?
- Fed-up landlords quitting Auckland - $1m home to be sold with $1 reserve
- Young Kiwi artist selling her multi-million-dollar Waiheke homes
But the market can go the other way, too. Let’s say, property prices fall by 10%. Your property is now worth $900,000. Your equity shrinks from $200,000 to just $100,000 and you’ve lost half of your deposit.
Because you put in a fifth of the money, your big mortgage magnified your losses by five. This is the dark side of the big mortgage that many property buyers don’t think about.
I know of one property investor who bought a property in Auckland for $1m at market peak. It is now worth $875,000, which has, on paper, wiped out more than half of the investor’s deposit.
Opes Partners economist Ed McKnight: "The answer to most downturns is to hold for the long-term." Photo / Fiona Goodall
In times like that, it’s natural to feel like your property value will never go up and your property will never generate a return. Or that the best thing to do is cut and run. But the answer to most downturns – whether in property or shares – is to hold for the long-term.
Although property values fell 1.5% over the last 12 months, over the last 32 years, the median annual increase has been over 6%.
There are many fair arguments that property values may not increase as fast as they have in the past. However, sellers who hold tend to do better than those who sell quickly.
CoreLogic’s recent pain and gain report divides property sellers into two categories. The first group is those who made money through the property sale – they sold their property for more than they paid for it. That made up 91% of property sellers in the last quarter of 2024.
The other smaller group was those who lost money through the property sale. They sold their properties for less than they paid for them. They made up the 9% of property sellers.
The main difference between the two groups is how long they held that property. The people who made money held their properties for an average of 9 years. Through that they made $289,500 on average. Those who lost money held for just three years and made a median loss of $55,000.
It’s easy to hold a property in theory, but it’s harder to do it in practice, because debt isn’t just a financial burden – it’s a psychological one, too. A big mortgage doesn’t just magnify the returns, it can magnify the stress and anxiety too.
- Ed McKnight is the economist at property investment company Opes Partners
