A market watcher claims that low Australian mortgage rates have made it easier for homeowners to repay their home loans. They can also invest which is a great way of increasing their wealth.
While it’s better for homeowners not to pay their loans first but Stockspot CEO Chris Brycki said that investors in current interest rates can be beneficial to those who have already paid off significant portions of their loan.
He explained that if you have $100,000 of mortgage interest and are paying $3,000 annually in interest, it is a smart idea to invest more than 3% in something to make it worthwhile.
The best investment vehicles
Brycki suggested that potential investors look for investment vehicles that offer at least the equivalent rate of return to their mortgage interest.
Some investment vehicles that outperform the average long-term rate of interest are Australian shares and high quality bonds, as well as international stock.
If you can invest for the long-term, it is best to avoid investing. Brycki stated, “The movements of the sharemarket are less important over the long-term.” Therefore, investors should look at a long term investment plan.
Additional savings could be used by homeowners to buy another home. Brycki explained that property investors could benefit from negative-geometric tax benefits.
He stated that although it was a popular strategy in Australia, it is not risky as it concentrates your assets into one investment class and increases your chances of taking out another mortgage.
Brycki said that it was important not to forget about other factors such as lifestyle and risk tolerance. These are just a few of the considerations Brycki identified.
Repay your mortgage, or open an offset account
Additional savings? You can also invest it
|Returns||It is more prudent to invest when the mortgage interest rate drops. Current owner-occupied mortgage rates average 3% per annum||Compare the expected return on investments to the mortgage rate.|
|Tax||Is your interest tax deductible? This is based on whether it’s your primary residence or an investment property.||The after-tax return of investments will be affected by your tax situation as well as the level of concessional capital gain or franking credit.|
|Time horizon||It’s a safer option to pay down the mortgage if the period remaining on it is less than three years.||The more time it takes to pay off your mortgage the more attractive investing becomes. The chances of you making more money from your investments than the mortgage rate are greater.|
|Safety buffer||It is essential to have enough savings and to be able repay your mortgage on-time before you invest.||You should ensure that your investments are liquidable if you find yourself in difficult financial circumstances.|
|Income certainty||Lower incomes make it easier to pay off your mortgage.||A stable income makes it easier to invest. There’s less risk you’ll need to sell down your portfolio early to meet mortgage repayments.|
It might interest you to find out the true cost for property investment. Your Mortgage provides this tool for free.