Buy LICs or pay down mortgage?

Agree 100% - I think that article while very good is niche and specifically suited to retired people with a high proportion of shares with a limited buffer in place and a paid off PPOR. This is clarified in the comments section I think.

For me personally, like many approaching 40yrs old people in Oz I have a fair amount of my outside super net worth tied up in my ppor which still has a decent chunk to pay off. This concerns me and I want a more even spread between real estate and diversified shares. Given I'm on a high tax bracket I can either debt recycle as Terry describes and count the interest payments against my tax payments OR just spend money in my offset to buy shares and not get the tax benefits. To me the latter (ie. Not using debt recycling) is insanity and either way I still end up having the same amount of debt. Debt recycling just pays it off faster and REDUCES my risk given improved cashflow.

The key is taking on the extra debt like an LOC. I don't think I can time the market, but if I'm investing extra borrowed money outside my debt recycling using a higher interest rate I want it to be at opportune times and not just lump summed in and hope. It's one thing losing 50% of your capital during a downturn, another thing losing that much and having to pay interest every month on the original amount as a constant reminder....

As @Nordrog and PT have written having access to extra funds during major downturns can set you up for life. But leverage is a double edged sword.

 

I see what you’re saying. The article mostly does use examples of people’s debt staying the same.

There’s behavioural issues to consider as others have mentioned - knowing the debt was used for shares and having a nasty downturn will feel different than just having a home loan and a separate share portfolio.

I know it makes no rational sense but humans aren’t all that rational.

 

Just to be clear it’s not for debt free already retired people - there is only one section regarding that. Most of it is scenarios for people with debt who are still working and saving.

But clearly I might not have done the best job getting that across!

 

All the detail about interest rates and market returns kind of misses the point. If you are going to or have committed to a non deductable loan and going to or have committed to buying income producing shares then for most people debt is required if they want the house in the short, near or even medium term. Of course, the most rationale approach would be to use debt only when it is deductable and pay cash for the PPOR, but see my previous point! So instead take a portfolio view of the assets and debt. Following from this, debt recycling as terry_w outlines in his writing on this forum is highly rational imho. Ultimately if you don't truly understand what you're doing you probably shouldn't be doing it.

 

I never said terry’s writing is irrational!

I’m saying how people feel more comfortable when their debt is used for PPOR while having a share portfolio versus having debt for the share portfolio.

That’s to say people’s behaviour around this stuff is irrational and that’s why it’s not always about what the spreadsheet says is the right decision. That’s all.

For the record I think it’s a perfectly fine strategy but I can also see why it doesn’t suit some.

 

So true.

 

@Terry_w all going well, would this approach ultimately end up with ppor being paid off quicker (dividends from investment split + tax returns from tax deductible investment loan channeled towards mortgage) with the idea being you still have debt once the mortgage is gone but your underlying portfolio has hopefully increased over the years to a size where this debt is easily manageable?

 

The OP's question is one I'm grappling with at the moment, and this recent article (American though) was quite thought provoking:

What’s the Return on Mortgage Prepayments?

In a nutshell it's not as simple as just saying my home loan interest is X%, and therefore my rate of return is X%, once you factor in the tax implications of debt recycling. I couldn't get my head around the real return of money in an offset account or redraw given all the variables involved, so I was very happy to see that it's not as straightforward as I thought it must be before diving into the analysis!

My current plan is to treat the equity + offset in the home as equivalent to bonds (they are not equal but this is what I'm running with). Then to have a relatively "conservative" investment allocation of 34% PPOR, 33% aussie index and 33% international index rebalanced quarterly (i.e. if/when I buy shares). Pulling out all the equity on the PPOR to invest in shares is a step too far for me in terms of SANF, but this ratio seems ok.

Here's a 10yr simulation using 1 million as start house price (not mine - but an easy number!) I ran in portfoliovisualizer (data is ASX200 index from 1980, brisbane property from 1970, standard US Stock index - I imported the first 2 from data I found online so use at your discretion). Doesn't account for tax, past history not repeating etc. but does give an indication of what can be achieved with this method. It also doesn't include any additional funds put into any of the three investments, which you would need to do if you have a mortgage (i.e. paying down principle). If using the 50th percentile result (i.e. average) then at 10yrs you would have around $600K in equity. Don't bank on these results, but I find them interesting for my own use.


This may be gibberish, but it is definitely not advice!

 

@Ross36 are you saying you're able to treat cash in offset as equity in the home for investing? I like your idea. The one thing I'm weighing up is how difficult the structuring of something like that is, and whether there are only certain lenders who allow it.

 

Debt recycling will reduce tax. Market returns will determine which strategy prevails. With today's market I would put it all as an offset against PPOR. if make dropped 20% I would be tempted to buy VAS at higher dividend yield.