What is Leverage (property)?

What is Leverage?

Leverage is one of the most important terms in property investing. It can be one of the arguments why some investors see property as superior to shares.

Leverage in property just means using borrowed money to buy/control an asset that’s worth more than what you put in yourself.

Instead of saving $800,000 to buy an $800,000 home, you might put in $160,000 (a 20% deposit) and borrow the remaining $640,000 from the bank. You now control an $800,000 asset with $160,000 of your own money.

Case Example

Let’s say you buy a property in Melbourne for $800,000. You put in a $160,000 deposit and take out a $640,000 mortgage.

Over the next few years, the property grows in value by 10% – so it’s now worth $880,000.

You’ve made $80,000 in capital growth. But here’s the thing: that $80,000 gain is on the full $800,000 property — not just the $160,000 you actually put in.

That’s a 50% return on your own money, from a 10% rise in property value.

Without leverage, for example in regular share investing, a 10% return on a $160,000 upfront investment is only $16,000 (far less than the $80,000 for property).

Why Property can be leveraged

Unlike shares, where most lenders won’t let you borrow more than 50–70% of the asset’s value, Australian banks will typically lend up to 80% of a property’s value — and sometimes even more once you factor in Lender’s Mortgage Insurance.

This means property is one of the most accessible leveraged investments for everyday Australians – not needing millions of dollars to control millions of dollars of assets.

A few other reasons property works well with leverage in Australia:

Banks are comfortable with it. Residential property is considered relatively stable security for a loan.
The asset generates income. Rental income can help offset your mortgage repayments.
Tax rules can work in your favour. If your investment property is negatively geared (your expenses exceed rental income), you may be able to deduct that loss against your other income

Downside of Leverage

It’s important to be honest here – leverage amplifies losses just as much as it amplifies gains.

Using the same example: if your $800,000 property drops 10% in value, you’ve lost $80,000 – which is 50% of the $160,000 you actually invested. You still owe the bank $640,000, but your asset is now worth $720,000.

Using Equity to Leverage Further

One of the reasons experienced property investors are able to grow portfolios over time is by accessing equity – the difference between what a property is worth and what you owe on it.

As your property rises in value and you pay down your mortgage, your equity grows. Some investors then use that equity as a deposit on a second property – effectively using one asset to fund the next.

This is called equity recycling, and it’s a strategy many Australian investors have used to build multi-property portfolios without needing large cash savings each time.

The Bottom Line

Leverage can be seen as good when it works in your favour but also amplifies losses if it does fall that way. It is a tool many property investors use to generate wealth and is a key reason why some investors favour property over other investment classes.