What is capital growth?

Two simple words – ‘capital growth’ are like gold to property investors. We explain what it all means.

Two simple words – ‘capital growth' are like gold to property investors. We explain what it all means.

It's no secret Australians are enthusiastic property investors. And there are good reasons why so many of us own, or aspire to own, a rental property.

You see, along with regular rental income, a well-chosen property can deliver attractive capital growth, often referred to as ‘capital gains'. Unsure how this can benefit you? Read on.

Property values rise over time

Capital growth, sometimes known as 'capital appreciation' simply refers to the increase in the value of your rental property over time. As a guide, if you invested in an apartment costing, say, $500,000 two years ago, and sold it for $550,000 today, the property would have notched up capital growth of $50,000.

The reason this type of growth is so valuable to investors is twofold. Firstly, it is money you have earned without lifting a finger – and that's always appealing.

Secondly, capital growth protects your wealth against inflation. Think of it this way. If you'd stored $500,000 in a savings account instead of buying a rental property, your money would earn interest but the value of your capital (in this case $500,000) would remain unchanged. In fact, thanks to inflation, the purchasing power of your cash savings will decline over time.

The capital growth of property protects your wealth against inflation.

How can you use your capital growth now?

The value of capital growth isn't only reserved for when you sell your property, but also provides additional equity that you may be able to today.

Find out more about how home equity works and how you may be able to use it to help you grow your wealth or offer a very affordable source of funding.

How to calculate capital growth and what to expect?

It's impossible to predict how residential property will perform in the future. It also pays to bear in mind that property values don't continuously rise. Sometimes values dip, at other times values remain static. However the long term trend is for values to rise steadily.

As a guide, figures from research group CoreLogic show property values in our state capitals have risen by an average of 5.6% annually over the last ten years. This may not sound like much but at that rate your property could double in value over the course of a decade. If you were to buy a $600,000 property, a capital appreciation of 5.6% on average for 10 years would work out to be $862,202. However, this figure can vary widely depending on how well the property market does each year.

Expert help is important

With long term gains of this magnitude up for grabs, it's no wonder investors flock to property. But you still need to be able to handle the costs of owning your property in the interim.

That's where your Mortgage Choice broker can offer valuable assistance. We can explain how much you are able to borrow – a factor that will shape where, and which type of property, you can afford to invest in.

Your choice of investment property loan matters too as it will make a tremendous difference to your cashflow and your long term property returns.

For expert support making the most of your rental property, contact your local Mortgage Choice home loan expert today, or call us on 13 77 62.


Posted in: Investment loans