Paying Off Your Mortgage Sooner vs. Keep on Investing – What You Must Know!
Should I Focus On Paying Off My Mortgage OR Keep Investing ?
When you have a mortgage that you have to pay off, you also have two ways of dealing with it.
The most common and simple one is, obviously, paying it off as soon as you can and never have to deal with it again. It goes without saying why most people out there that have taken a home loan prefer paying off their mortgage on time or even quicker.
On the other hand, you could also invest – in either shares, assets, or property – and use the returns of those investments to pay off your mortgage. In short, you put the money meant to pay off your mortgage into something that can help you round up a profit – a profit that you will use to deal with your debt.
Basically, you end spending none of your money on the mortgage – your money will be invested, and the profits will be used to debt and expenses.
Paying Off Your Mortgage
It is well known that, if you use any savings or extra cash for additional mortgage repayments, you could save thousands of dollars in interest and, obviously, pay off your loan much sooner.
Naturally, paying off your mortgage sooner comes with quite some benefits that most of us would like to take advantage of. However, doing so also comes with some drawbacks that we should pay attention to when we focus on paying more towards our mortgage.
Minimize Interest Payable – for example, if you have a linked offset account that has funds in it, you can reduce the interest payable on your mortgage by the amount that you have in the account. Such an offset account can help you shorten the term of your loan since you will have an easier time paying it off sooner. In the best-case scenario, an offset account could help you save even $100,000 in interest and, on top of it all, reduce your loan term by seven years.
Guaranteed Return – as you know, extra repayments on a mortgage get you a tax-free return. For example, if you make repayments on a loan with an extra of 5%, you get that 5% back as a return. In short, you generate an after-tax return that is equal to the interest rate of your mortgage.
Financial Security – naturally, if you pay your mortgage faster, you will also own the property faster. In a volatile and uncertain environment, such as the property market, extra repayments will give you peace of mind in terms of the safety of your property. Not only that but you will also rule out the financial obligation that comes with your mortgage much sooner – the result will be an improvement of your quality of life and of your financial well-being.
Build Equity – when you invest in your property – as in paying off your mortgage faster – you build equity. This allows you to borrow against your equity so that you can purchase other investments and, in the end, diversify your investment portfolio.
Property Depreciation – naturally, a property may either appreciate or depreciate in time. Even though you may think that it will appreciate and increase the amount of equity that you have, there are still chances that it will depreciate in value. This can make you lose equity and harm your financial liberty.
Strategy Risk – even if paying off your mortgage sooner means that you benefit from tax effectiveness, it also means that you concentrate all of your wealth into a single asset. This can be a risky strategy, mainly because you will lack diversification. In the end, you may even become vulnerable to a market downturn.
Opportunity Cost – obviously, when you focus on your mortgage, you may miss out on investments that have high returns. For example, if certain shares or another asset/ property comes with a return rate of 8% and your interest rate is only 5%, you could be missing a higher return.
It goes without saying that diversifying your portfolio and spreading your wealth across property market, shares, and assets can be a very good strategy and can round you up some high returns.
Naturally, doing so comes with advantages and disadvantages as well – including some other things that you have to take into account.
Things to Consider
You should know what kind of return you want from your investments and make sure that it will be better than paying off your mortgage sooner.
Advisers recommend people to have at least 50% equity in their property before they start investing money in other areas.
If you are left with extra cash after making your minimum mortgage payments, they also recommend you to invest in a share portfolio or other assets and make extra payments on your mortgage at the same time.
Investment Return – when it comes to shares, for example, they can provide you with income in the form of dividends – and they do so over an extended period of time. If you choose your investments carefully, you can end up with additional income that can go towards paying off your mortgage.
Compounding – investing comes with long-term financial benefits. However, it is known that you have to allow these investments to grow. Overall, you can enjoy lower tax rates on long-term financial benefits.
Diversification – obviously, if you diversify your wealth across multiple areas, you reduce and may even cancel the risks that come with poor performance. In short, you make sure that if your investment or income takes a hit, you won’t hit rock bottom, as you will have other investments that will round up profit for you.
Income Tax – managed fund assets and shares are subject to income tax when it comes to the distribution of dividends. Moreover, capital gains tax may also apply when and if you sell these assets.
Strategy Risk – no matter the area you invest in, it may be unpredictable and turn out to be a bad investment. This is why it is recommended that you do your research before you consider investing.
Market Fluctuations – if you invest in shares, these investments are affected by market fluctuations. Advisers recommend people a long-term approach when considering shares investment, as well as counsel from a financial adviser.
The Bottom Line
As you can see, paying off your mortgage sooner can have as many benefits as investing in shares, assets, or property market. This is why it is important that you consider all of the aspects mentioned above before you decide between the two.
If you have a history in investing, then you may want to rely on your experience and come up with a strategy that will allow you to invest in a certain area and use the returns to pay off your mortgage.
On the other hand, if you are new in the world of investing, then you may want to deal with your mortgage as soon as possible and then try your luck with shares or assets.
No matter what you decide, you may want to contact our office for refinancing home loan help. We are able to answer your questions and provide you with the information you need in terms of home loans.
If you need a lender – we’ll help you find one! We will also help you find the best loan for your needs so that you don’t need to worry about repayments too much. Reach out and contact us today for more information! Contact us on on 02 9121 6247 or submit your scenario online.
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