There’s no better feeling than paying off your mortgage – nothing beats no longer having to pay that monthly amount to the bank. When a client reaches this milestone the feeling of security is so powerful because they know if anything were to jeopardise their income, they will always have their home.
This is why most people aspire to pay off their family home and this is the most conservative and safest financial strategy, but it’s not always the best strategy for everyone. The problem is that too often the focus is simply on paying off the mortgage. So 20 years down the line you’ve paid off your home but you may not have much else to show for your years of hard work.
Many people may need other assets to help generate income if they want to live the life they choose in retirement. There are arguments to say that for some people putting your money elsewhere is a more effective strategy than paying off your mortgage. This is because you may be able to generate a better return elsewhere. While there are a range of options available to invest money, it’s important to choose the right one for your risk appetite, lifestyle and stage in life.
For some people, taking advantage of salary sacrifice rules and directing some of those extra mortgage payments into superannuation may reduce their tax. While paying off the family home will certainly save you future interest payments think of it this way – current interest payments on home loans are only 4% and may head downwards if current predictions hold, while your superannuation will save you tax which could be a return of up to 31%.
Another solution might be to borrow money against the family home at the current low interest rates. This is what we call leveraging, so you invest in other assets that earn you income like property or shares. You could decide to do this instead of paying off your home loan so quickly.
Property is Australia’s number one go-to investment – many people use equity to buy an investment property which gives them another asset. The problem with buying property these days is you’ve got to borrow a lot of money to get into the property market. So another strategy that you may consider is to borrow money to buy share portfolios. This way you can start a lot smaller and have less risk – even as little as $50,000 is enough to start a decent share portfolio.
The concept behind these strategies is called debt recycling. As you pay off your family home and your home mortgage gets smaller, you might look to use the equity in your home to take out an investment loan to purchase other assets. So you’re recycling your debt into other investments. For some, debt levels may stay the same, but you recycle your debt from bad debt to good debt.
Whether these types of strategies work for you is really a personal thing. It depends on your circumstances, appetite for risk and your timeframes. There’s a certain level of risk in debt recycling and it’s definitely not for everyone. When you invest in the stock market, there can be rapid and violent movements, so investing in shares will also depend on whether you’re comfortable with that level of risk. If you’re the type of person who will stay awake at night worrying about what’s happening to your share portfolio when Trump fires off another tweet then this isn’t the strategy for you.
While these type of strategies aren’t a short-term proposition, they can be effective for investors who have at least a seven to ten-year timeframe. If they’re something you’d like to consider, then you should get advice on your personal circumstances to make sure you have a plan in place that helps you achieve your unique goals.
James Williams is an Executive Advisor at Viridian Advisory
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