Buying your first property is an important milestone in anybody’s life. The excitement of having that first meeting with a mortgage broker to define how much you can afford, Finally picking up the courage to make an offer, Feeling those stomach cramps when you realise costs were a bit more than expected and being a bit unsure of how life is going to look like after mortgage repayments are met.
Most of the time, this ends up being the most successful financial transaction in most people’s lives. Especially if you live in Melbourne and Sydney. A strong property market, the gearing power that being able to use the bank’s moneys provides, and the fact that Capital Gains Tax is non-existent for principal places of residence.
Nevertheless, it astonishes me how many people stop there. I usually end up having a meeting with 2 potential clients 20 years later, where they unequivocally ask me why their neighbours’ financial position looks significantly better than theirs.
It’s not that focusing on paying your mortgage as quick as possible is a bad strategy. Initially, this seems like the smart thing to do. In the end, we have all heard stories of people having ‘too much debt’ and going bankrupt as they fail to meet their ongoing commitments. Seems like no debt equals no problems. But maybe the question we should be asking ourselves is not “How quickly can I repay my mortgage?”. Maybe better questions to ask ourselves are:
With Interest Rates close to 17%, and the ASX only returning close to 11% in 1989, it’s understandable why people who took a mortgage out may think this way. The certainty of reducing your outgoings by 17% vs promises by the unknown share market is not a difficult decision to make. When you have a young family that needs to be fed, dressed and cared for; you do not place your bets on surprises.
Each person has a different level of risk tolerance and there is no perfect decision when it comes to your personal finances. It is a fact, just as real as gravity, that the more risk you expose yourself to, the more chances you can reap a better outcome. And you shouldn’t expose yourself to more risk than you are comfortable with. But in my experience, its not that people don’t tolerate risk. It’s that people fail to understand the risk they would be exposed to if they do something different.
This is where a financial advisor can really assist. Educating clients on what options are available, and clearly stipulating the risks of each alternative. If you have a mortgage and you are not familiar with the terms ‘debt recycling’ and ‘dollar cost averaging’ I suggest you engage an experienced financial advisor and ask him/her to explain these to you until you are able to explain them to someone else. At the very least, it could save you a few years of mortgage repayments, and in the best of cases, you could be retiring way before you planned.
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