Pay down the mortgage vs invest into markets?
A very common question we get asked as financial planners – should I pay off my mortgage as quickly as possible? Or should I be focusing on building assets such as superannuation or an investment portfolio.
Unfortunately there is no silver bullet or hard and fast rule on the best strategy here. Many experts will have differing educated views and opinions. Ultimately one person’s circumstances will be different to the next person and a blanket rule or one strategy is unlikely to be best for everyone. To give you two perspectives:
Argument – Property first, then build assets later
Finance 1.01 would suggest ‘Repay Non-deductible debt’ first and build wealth / assets after. Ultimately most people want to be debt free for peace of mind and reducing one of the average households largest long term expenses sits high on the bucket list. Additional benefits include:
Interest savings. Take for example a $160,000 loan with a 4% interest rate over a 30 year loan term, interest payable over the life of the loan is approximately $115,000. By paying this loan off in 15 years, brings interest down to around $54,000, a saving of just over $61,000. These savings can be used for further investment.
Equity Uplift – relying on increased property valuation is a high risk strategy, however investing in your mortgage can increase your equity, enabling additional choice. By making additional payments or down payments to your loan, you will increase the portion of your home that you own (not the lender) allowing you to utilise this equity for additional investment purposes (if appropriate).
Counter Argument – Low interest rates, having a large retirement balance is going to be paramount.
The Reserve Bank of Australia (RBA) cut the official cash rate to a record low of 0.25% amid the coronavirus pandemic and has an impact on mortgage and business loan rates. Savings rates on typical bank accounts have subsequently reduced so leaving funds in a bank account is unlikely allow your money to work hard for you.
Investing will depend on the investors risk appetite and objective, if investing is purely to take advantage of any short term volatile or depreciated markets, the result can prove problematic. While investing is associated with making your hard earned money work for you, it is not supposed to be a stressful experience so setting the foundations is vital. While investment market returns can be attractive, they are also uncertain – where paying down debt provides a guarantee. If investing is something that may provide sleepless nights then having certainty of mortgage repayments and home ownership over the potential rollercoaster ride of the stock market (even if the potential gains are greater) is likely to provide greater health and wellbeing.
While we can never rely on past performances as an indicator for future performance, below provides a snapshot of the Index investment returns as at 31 May 2020. Investors who have invested their moneys into the below indexes would likely have experienced these kinds of returns (pre-tax).
The reality there is more than just two strategies and having a greater understanding of all strategies is vital to making an appropriate judgement. To help you make a greater personalised and educated decision on what is right for you, ensure you make an appointment with your financial planner to understand what will work best for you in your circumstances
Budget Planning, Financial Planning, Investment, Wealth Creation
