PLOUGHING more money into your home loan gives you more bang for your buck each mortgage repayment.
But this doesn’t mean it’s always the best way to make the most of lower interest rates.
We have been conditioned to believe paying off our mortgage as quickly as we can is the key to financial success.
But paying off your debt faster than you need to will only save you interest, it won’t actually grow your wealth in any practical sense.
Realistically you can’t live off your home because you don’t realise it’s value until you sell it, which may be never.
This is why investing some of your free cash and building your savings over the long term is an attractive option.
WHILE you can take comfort in the reality that interest rates will stay low for a little longer, you need to ask yourself the question – should I try to get years ahead on my mortgage, or am I better off doing something else with my money?
But before opting to invest elsewhere, it’s wise to make sure you have a safety net – by either being a few months ahead on your mortgage, or having enough cash handy to cover living expenses for a period of time. Having some cash set aside means you can invest what you have left over at the end of each month.
Paying $100 extra each month off a $200,000 mortgage with 20 years left will save you $14,000 in interest and have your mortgage cleared just over two years earlier (assuming a 5 per cent interest rate).
Investing the same amount for 20 years earning 7 per cent will give you an extra $50,000, with over half of this amount coming from interest or capital gains. In other words, you are more than doubling your money.
It’s worth noting that if mortgage rates were higher the interest savings you would make from paying extra off your home loan would be greater. This is why lower rates support investing your money in investments that can grow your wealth.
So given you already own your home, it’s a good idea to spread your wealth to different asset classes, so investing in shares is the option that will help you achieve this.
You don’t need to be a stock picker, instead you could opt for a listed investment company, which owns a portfolio of shares managed by professionals.
An alternative is to direct your extra cash to your superannuation.
While this is a more tax-friendly environment for most Australians, you can’t access the money you put in until you are at least 55 years old.
You might consider extra contributions to super if you already have built up your savings and know you won’t need this money.
Over time, the value of your shares will go up and down as share markets rise and fall, so you need to have time on your side to weather any downturns.
The intention is you won’t draw upon these funds to meet living expenses – you can use your safety net for this. Or if you need some extra cash you can stop saving and investing, and use these funds to cover short-term living costs.
If you are one half of a partnership, it could be a good idea to put the investment in the name of the half with the lowest tax bracket.
This will help manage the tax paid each year.
AS the interest rates we receive on our cash and term deposits are so low these days, saving to buy your first property can be helped along by investing a small amount of your wealth in shares.
Investing your deposit savings means you need to have a realistic idea as to when you think you might be buying a property.
If it is within the next three to five years, it would be risky to direct a significant amount of hard-earned savings towards shares, which can go up and down in value. Instead you might only invest a small amount – you want to have a degree of certainty as to the value of your savings.
But if you have a longer time frame it could be worthwhile investing a greater portion of your savings in the share market in a bid to get a better return than what’s on offer from cash and term deposits.
At the end of the day you should only invest if you have the right investment time frame. For shares this is five years and residential property it is at least a decade.