In Australia we’re conditioned to pay off our mortgage as soon as possible, aren’t we?
Our culture drills into us from a young age - buy a house, pay off the mortgage, and then settle into life comfortably. However, the reality is no longer that cut and dry. In fact, paying off a mortgage early might weigh you down and prevent you from growing your wealth more easily. So, if you’ve been asking yourself, “Should I pay off my mortgage and invest?” then we hope this article provides good food for thought.
Diversification is key - debt reduction and asset acquisition
Here at ActOn Wealth, we believe diversification is the key to success, irrespective of your circumstances. If you have all your eggs in one basket, it just takes one single hiccup and they’re scrambled. And we don’t want that happening to you. So, what does this mean? It means there is no mortgage versus investment; there is instead mortgage and investment.
The pros and cons of paying off your mortgage early
If you’ve asked yourself, “Should I pay my mortgage off early or invest,” and you’ve decided that the answer is paying off early, then let’s explore the pros and cons:
Paying off your mortgage early - the positives
Congratulations - you’re a homeowner! For many of us, we say we’re homeowners when, in fact, technically speaking, the bank still owns our home. In this case, you’re now a legitimate, bonafide homeowner. That’s a significant asset belonging to you. That Great Aussie Dream is yours!
Interest saving: With your debt cleared, you no longer pay interest to your loan provider. So that money is now freed up to be spent - or invested - elsewhere.
Monthly payment saving: Not only do your interest repayments stop, so too do your principal payments.
No dark cloud hanging over you: For many, those monthly payments can be a monthly weight on your shoulders. But, once they’re gone, you might feel like the Devil is off your back.
Paying off your mortgage early - the negatives
We’re enjoying relatively low mortgage rates right now in Australia. Let’s assume the average rate is 2.5%. In contrast, the average stock market return over ten years is around 9%. So paying off your mortgage in ten years is not as attractive as investing in the stock market for the same amount of time.
Loan penalties: In many cases, loan providers bank on your long-term debt and the interest it provides. They don’t want that gravy train to finish early -
they want it on the long-haul route! As a result, many loan providers penalise you for paying off your mortgage early. Beware of the small print.
Credit score: Although this is probably one of the weaker cons, it is a con nonetheless. Having a mortgage can ironically bolster your credit score, whereas no mortgage could decrease your credit score.
Paying off your mortgage vs investing -
questions to ask yourself
When a client comes to us asking, “Should I pay my mortgage off early or invest?” we typically ask the following essential questions:
What is your risk profile, or where do you lie on the line between low-risk, low returns and high risk, high returns? This is the most important question to ask first of all, as it sets the tone and influences every other step you take.
What is your age, and how long before you retire? This question essentially sets the timeline. Whilst you’re employed, you have an assumed regular income, whereas once you retire, you will be solely reliant on any investment streams you
have established, one-off superannuation payouts, pensions etc.
How much money do you want in retirement? It’s not just a question of when you will retire, but how you will live thereafter.
What are your goals? This is a personal question that only you can answer. Is your goal to fund a $5k holiday every year? To comfortably manage any health concerns in the coming years? To help other family members, perhaps by taking care of their tertiary education or helping with a home loan? There is no right or wrong answer to this question. But if you’re asking yourself, “Should I pay off my mortgage early or invest” then you have to factor in your goals.
What are current interest rates? As we’ve previously mentioned, current interest rates in Australia are reasonable.
Is this a personal home loan or an investment home loan? The former is not tax-deductible, whereas the latter is.
Investing instead of paying off your mortgage
“Should I pay off my mortgage or invest?”
Perhaps you’re now asking yourself this question in a whole new light. Indeed, you may have decided to reduce the amount you’re contributing in principle to your home to use that surplus to fund an investment portfolio instead. In principle, this is a good move as it means you’re allocating more resources and diversity toward wealth creation channels. However, building a successful investment portfolio is not a foregone conclusion. It too requires careful planning, knowledge and expertise. So we’ve created more advice if you’re new to investing and wondering about how to start a share portfolio or managed fund.
Your ActOn Wealth financial advisor is here to help
It is not always easy to decide whether to pay off your mortgage early or use that money to instead grow an investment portfolio. We’ve listed some general pros and cons here, and we’ve recommended diversification as being key to wealth success. However, we realise that no two clients are in the same situation at the same time with the same amount of money. True success lies in creating a plan that is best for you. That’s why we’re here to help. We’ve got the expertise and knowledge. You’ve got the goals and needs. Let’s put them together and navigate you through this decision. Contact us today and see how our experienced financial advisors can help you make the best choice.