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11 November 2020

How to Grow Capital

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How to Grow Capital

Most young people begin their financial careers with a regular income but have limited capital (savings) remaining at the end of each month after paying tax and various other living expenses. Acquiring capital requires a strategy that usually involves years of deliberate and disciplined saving. One of the most effective methods of saving is by acquiring a property that is geared (i.e. financed by a bank).

How to grow capital

Most young people begin their financial careers with a regular income but have limited capital (savings) remaining at the end of each month after paying tax and various other living expenses.

Acquiring capital requires a strategy that usually involves years of deliberate and disciplined saving.

One of the most effective methods of saving is by acquiring a property that is geared (i.e. financed by a bank).

The advantage of a mortgage bond is that it results in forced monthly savings.

Ventura Estate apartment interior (Broadacres)
  1. The owner is exactly that: The owner of his or her own property, leading to a sense of empowerment.
  2. Over a period of time, capital is acquired, frequently for the first time. This happens in two ways:

i. The property itself escalates in value. Although property values have recently been static it is unlikely that this will continue. The cost of building has increased on an annual basis and property prices (and therefore property values) will be forced to follow suit. It is probable that within the next year or two an adjustment will occur and property values will increase accordingly.

ii. The forced savings (i.e. the monthly mortgage repayments over a period of years) will automatically accumulate capital value as the bond is paid off. From this, two results follow:     

  • If the property is held for the full payment of the mortgage bond, the owner has an asset that is paid in full, representing pure capital; or
  • If the owner decides to sell the property during the period of the bond, the owner will have accumulated a reasonable amount of capital necessary for a sizeable deposit on the new property. The longer this process is followed (repayment of the bond and accumulation of capital), the more capital will be available for the new purchase as well as the upgrading of the new home, as and when required. 

There is a common fallacy that renting a property is preferable to purchasing a property.

Leases leave one vulnerable to the landlord as well as the market which can change dramatically over a short period of time.

Furthermore, leases do not achieve capital growth.

Very few people are able to save methodically. After years of renting generally no capital is saved, leaving the lessee in the same financial position they found themselves in when they commenced their leasing decision.

In short, buying a property will lead to the achievement of CAPITAL WEALTH in the MEDIUM TO LONG TERM. Renting a property shall not.

Yours sincerely,

Peter Blanckenberg

Summercon Director

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