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Your mortgage, your super or your investments
It’s tempting to pay off your mortgage as quickly as possible. But what about investing?
Building your wealth by paying off your mortgage, doesn’t mean you shouldn’t also consider other investment opportunities. With Australia’s residential mortgage interest rates at historic lows you can pay off your mortgage sooner, but it’s also worth considering whether you should use your savings to invest in other assets instead, such as an investment property or shares.
It’s all about looking at a bigger picture of your wealth building strategy and the many options you can take to accumulate wealth.
Benefits of investing in your home loan - the power of pay down
Reducing your interest is always good. Paying off a $160,000 loan with a 4% interest rate in 30 years means interest is approximately $115,000. Paying it off in 15 years brings interest down to around $53,000 – a saving of just over $61,000, which could be invested and used to make more money for your retirement – or simply enjoyed.
Up your equity
Investing into your mortgage will increase your equity, enabling higher line of credit loans. You can use this credit to renovate your property, and increase its sale value.
Liberate your lifestyle
There are other significant benefits to investing in your mortgage. The peace of mind of being debt free is high on the list. Three quarters (76%) of the 2040 people surveyed for MLC’s Australia Today1 report said that their mortgage has a big impact on their lifestyle – so removing one of life’s biggest financial burdens can have a huge effect on you and your family.
With your income freed up, you can also save, splurge or invest.
Key watch out:
Don’t forget, that depending on what type of mortgage you have, there could be limits to how much you can repay in a given period.
Benefits of investing outside your home loan
There are many benefits of investing outside your home loan that are worth considering as part of your complete wealth building strategy.
Build your super
Investing into your super is certainly an option homeowners should consider; given 60% of Australians expect they will not have enough for retirement, according to MLC research2.
One great benefit of investing into your superannuation is that concessional (before tax) contributions are taxed at a maximum rate of 15% (or 30% to the extent your concessional contributions together with your income exceeds $250,000). Investing into your mortgage, however, is drawn from after tax income which was subject to tax at your marginal tax rate (this could be as high as 47%).
You can contribute up to $25,000 per annum before tax as a concessional contribution. You can also contribute up to $100,000 per annum after tax as a non-concessional contribution into your superannuation fund. The annual contribution caps available for you to make personal contributions may be limited by employer contributions, salary sacrifice contributions and your total super balance. If you exceed the contribution caps additional taxes and penalties will apply.
Key watch out:
The key issue with investing in super is that generally you can’t access the funds until you’ve reached preservation age and retired, or you’ve turned 65.
Preservation age is 55 for those born before 1 July 1960 and gradually increases to 60, depending on your date of birth.
Spread your risk across multiple asset classes
To spread your risk and potentially increase your opportunity, often financial advisers will recommend diversification, which means spreading your investments across other asset classes.
Investing in shares or fixed income securities is one of many ways to diversify your holdings. Not only can this help you potentially build your wealth, it could offer some protection if the residential property market reduces in value.
Access share funds managed by experts
Knowing what to invest in is a challenge as past performance isn’t a guarantee of future performance, so another option is to let fund managers do some of the hard work for you. Fund managers have research teams who interview companies to understand their strategies and decide whether they will invest a managed fund’s money with them. Their teams regularly review these investments with the aim of gaining the highest return for investors like you.
Claim tax benefits where you can
Unlike the mortgage on your home (which is viewed as your main place of residence so you can’t claim investing tax benefits) there are many tax benefits you can claim on an investment property, including interest on the investment property loan and depreciation on fittings and fixtures. You can also make the most of negative gearing if you’re losing money on the property, offsetting your losses against your income. (Check out our articles on positive vs negative gearing).
Factors to consider when investing outside your home loan
Your return rate should be higher than your home loan rate
You should also think about other costs and income (rent or dividends) of any investment, including the tax benefits or costs, for example earnings from investment property, shares and managed funds are subject to income tax and you may also have to pay capital gains tax if you sell them for more than you bought them for.
Think about how easily you can sell your investments
As property is an illiquid asset, this means it takes longer to access your money if you need cash for some reason quite quickly. Without a crystal ball it’s difficult to predict what you’ll need, but the basic principle of investing is to make sure you have a rainy day fund and room to move in your cash flow if interest rates rises or other expenses arrive.
Know your time horizon
Decide whether you’re looking for a long, medium or short-term investment. While share dividends can offer an additional income stream, their prices can fluctuate from month to month, as can share prices. So if you want to sell, it will work in your favour if you don’t have to do it in a hurry and can ride out a downward market turn.
Above all, talk about your options with a qualified financial adviser
Sometimes paying off your mortgage faster is a great way to save on interest and accumulate wealth, but it’s a good idea to look at your complete wealth building strategy and make sure you’re not missing opportunities to build wealth elsewhere.
To pay off or hold off?