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## Deakin University

Incremental wealth through property acquisition

# Interest rates and increases in property values

House prices can be quite substantial; so many people seeking to acquire properties, borrow funds and subsequently pay interest. Hence it is important to consider interest rates in property decisions.

Assume you or your family owned a house whose price in 2016 was $1 million and the increase in that house price to 2017 was 10%. What would be the value of the house price in 2017? It would be$1,100,000.

But, does this mean that you have $100,000 more in your pocket than you had last year? How much interest would you have paid if you had an$800,000 borrowing on the $1 million house if you or your family were required to pay 5% interest on the borrowed funds? In short, you borrowed$800,000 at 5% interest: 5% of $800,000 is$40,000.

So, after paying your interest costs on the borrowings, your capital gain has been reduced: $100,000 -$40,000 = $60,000. Are there any other costs in actually “realising” the$100,000?

Yes! There are several other costs associated with buying and selling properties, such as buying costs (eg stamp duty) or selling costs (eg paying the real estate agent).