I have often spoken and written about the eagerness of banks and other financial institutions to lend you money so that you may buy real estate. This eagerness manifests itself in many different forms.
Firstly, the interest rates that banks charge varies with their perceived risk of the loan. Hence, the interest rates charged on credit card debt (presently at around 20% per annum) is much higher than that charged on business loans (at around 12%), which in turn is much higher than that charged on real estate loans (presently around 6%). In other words, banks encourage real estate loans above other debt.
Secondly, banks advertise their willingness to lend money secured against property in all the media: newspapers, magazines, television, bus-stop display ads, and bill-boards. We get so used to these advertisements that we forget to notice that there are no advertisements offering lending on mutual funds, unit trust, stocks, certificates of deposit, treasury bills, government stock, state obligations, futures contracts, options, antiques, paintings, oil, platinum, gold, silver, postage stamps, baseball cards, phone cards, or any other pseudo-investments touted by those whose main income comes not from investing in these items themselves, but from commissions on seducing others into the investments.
Thirdly, I regularly hear from the “You got it wrong this time” brigade, who claim that their bank readily lent them money to buy mutual funds, phone cards or any of the items listed above. They are missing two crucial points. Firstly, while the banks may lend them money on these items, that is not what the advertisements are targeting. The advertisements are specifically offering money to buy real estate.
And secondly, while a bank may offer finance that you use to buy those “investments,” often what they will require as security is your real estate. At the very least, they will require a personal guarantee. In other words, they are lending the money secured against you the person; with real estate, the loan is secured against the real estate itself (that is why many mortgages are assumable).
Fourthly, unlike a generation ago, when going to the bank to ‘try to get a mortgage’ was considered an onerous task that only the brave could embark on, today banks want to make the process of getting a loan secured against real estate exceedingly simple. That is why they advertise things like “our mobile mortgage managers can visit you at your home or your work, at a time to suit you, even in the evenings or during the weekend”, or “our no-hassles application process takes less than ten minutes”.
Finally, banks are willing to fix the interest rate on real estate loans for 30 years, whereas interest rates on other loans tend to be permanently floating.
Indeed, banks are so keen to lend you money to buy real estate, that it pays to be reminded of this from time to time. That is why I often ask a live audience to write down the following two statements:
1. Banks want to lend you money to buy real estate.
2. Let them give it to you!
However, while I may try to use the power of words in seminars, articles and books, it dawned on me that since we are in the 21st Century, it may be time to apply a technology developed in the 19th Century to further drive home the point. I am referring to photography – not the silver-bromide variety, but digital photography, with images sped around the world over the internet.
Consequently, I have my first offering with this column, taken a month ago in New York City, at the corner of Broadway and 49th St in Times Square. It shows a huge billboard on the Crown Plaza Hotel building with an advertisement for Washington Mutual, saying: “We’ve got a loan for every home, even this one”. The billboard incorporates a cut-away of a full-size home, complete with picket-fence, letter box, and real furniture. The photo was taken on a dull and drizzly day, and the shower-curtain over the bath-tub could clearly be seen flapping in the wind.
And here is the point. I have never seen such an elaborate advertisement for anything other than finance being offered secured against real estate. That is why I often say that banks are falling over themselves to lend you money so that you may buy real estate.
There are two things to note from all this advertising. One is that since banks consider real estate to be about the safest investment, so should you. The other is that you do not even need the money to buy real estate.
Banks have plenty of money, but (fortunately) do not want to go out and buy real estate. You, on the other hand, want to buy real estate, but do not necessarily have the money to do so. Here is a wonderful, symbiotic relationship in the making.
It is bank financing that gives real estate the powerful leverage or gearing that makes property such a lucrative investment. And banks make such a big effort to advertise their willingness to lend money secured against real estate, that we often get blasé about it. However, used well, this leverage can propel you from modest beginnings to great wealth in a very short time.
Dolf de Roos