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 worth considering whether you should use your savings to invest in other assets, 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. These savings 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. 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 Today (PDF, 866KB), opens in new window report said that their mortgage has a big impact on their lifestyle. 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.
The 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 research.
One great benefit of investing into your superannuation is that concessional (before tax) contributions are taxed at a maximum rate of 15%. Or at 30% to the extent your concessional contributions together with your income is over $250,000.
Investing into your mortgage, however, is drawn from after tax income which was subject to tax at your marginal tax rate. Your marginal tax rate 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.
Spreading your risk across multiple assets
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, opens in new window 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'll 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
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. Unfortunately you can’t claim investing tax benefits on the mortgage on your home, as it’s viewed as your main place of residence.
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 versus 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. 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 rise 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 always a good idea to look at your complete wealth building strategy and make sure you’re not missing opportunities to build wealth elsewhere.
Have confidence in your future with help from a financial adviser.
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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.