Capital appreciation is the strategy adopted by investors seeking growth from their investments above the rate of inflation. This is the strategy that for most people signifies the main purpose of investing; there are however additional investment strategies with different objectives.
An investor may receive capital appreciation from an increase in the value of the underlying asset or from re-investing the income they have received in the form of dividends.
To adopt this strategy an investor must be willing to take on a moderate to above average degree of risk. This type of strategy is better suited to an investor who can commit their funds for the long term; to recover from any market dips and for greater opportunity for growth.
Investing long term would mean committing your funds for usually a minimum of five years. This is something that might be suitable for individuals saving for their children, retirement or to pay off an interest only mortgage.
Case study.
Amy & David decided they would be better off opting for an interest only mortgage as opposed to a repayment mortgage. Instead of paying off their mortgage and interest they will only meet the interest repayments. They are able to invest the money they would have spent on repayments and by adopting the capital appreciation strategy their fund has the opportunity to grow in value.
If Amy and David had a repayment mortgage and made monthly repayments of £1000 for 25 years they would pay off their mortgage.
If however they had an interest only mortgage instead; they would pay only the £700 interest charges each month, leaving them with £300 extra. Investing £250 of the money they save each month into a capital appreciation fund could enable them to save enough in 25 years to pay off their £200,000 mortgage. The £50 remaining each month from opting for an interest only mortgage would equate to £15,000 over the 25 years. That’s £15,000 they wouldn’t have had if they had opted for a repayment mortgage.
Please note that investment performance is not guaranteed and that there is significant risk that the investment may not meet the needs of the mortgage holder. This example is only to highlight the capital appreciation approach and not intended as advice on mortgage strategy. If you require advice please contact one of our financial advisers on 0800 3892193.
Please note that in the current economic climate, many mortgage lenders are unwilling to lend on an interest only basis.