understanding financial jargon
When a firm or individual is deleveraging they are selling assets originally purchased with borrowings or debt, in order to repay that debt. The debt would have been originally taken out to leverage investment returns.
For example, a property investor may purchase a property for rental purposes, take out a mortgage on the property. The released money is then used as a deposit on a second property, which is then mortgaged, releasing funds for a further property purchase, and so on. In this way the property investor can take the money needed to finance a single purchase, and 'leverage' it to allow purchase of multiple properties, each of which will provide further rental income. If market conditions go against the property investor, they can sell off the properties, using the deleveraging proceeds of the sales to repay the debt.
While market conditions are favourable, leveraging can be beneficial to investment returns, but if the market starts declining with prices falling, the investor may not get back enough funds to pay off his total debt.
What to do if you need more help
If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.
We hope you found this information useful.
Copyright © Steve Gears Associates. All rights reserved. No portion of this site may be reproduced without written permission. All Trademarks are freely acknowledged.The information on this site is based on UK data unless otherwise indicated. Non-UK visitors should check with experts within their own legal jurisdiction before relying on information presented here.