Investing vs extra mortgage repayments

Hey guys. Im interested in your opinions. We currently have an outstanding mortgage of 450k. Each week we put an extra $800 on it. At the rate we are going it should be paid off in 8 years. At the end of this year my son will finish pre school which will free up an extra $200 a week. So my question is what would you do? Put the extra 200 a week on the home loan or open an etrade account and start investing?

 

Hi Phil

As to whether investing in property or shares is best for you is a decision for you, and you'll get plenty of opinions from people that are in the property camp vs the shares camp.

You might like to discuss with your accountant. I think you'll find that if you intend to invest in shares, you are best to first put the money on your homeloan, and then take out an equity release loan against your property for the purposes of using the funds to invest... in order to make the mortgage interest eligible for a tax deduction. If you just use cash for your investing then all your mortgage interest remains non-deductible.

 

Hi Phil, there are a few loan products that are excellent for debt recyling - this allows you to reduce your PPOR non-deductible debt and 'recycle' it into deductible by buying income producing shares. As Jac says, it's a better way to invest rather than using cash.

 

Tax Tip 2: Debt Recycling

 

Great advice from the above 3, if you plan on investing in shares using the existing debt and turning it into deductible debt is a great option to kind of get a best of both worlds situation. You'll be able to get the shares up front and start generating the return on them straight away and still put the money into paying down debt.

Realistically as long as the return you generate on the shares is as high or higher than the interest rate on the mortgage then you're breaking even financially while adding some nice diversification to your overall investment portfolio.

If you do go down the path of dumping the $200 just be aware of brokerage when buying shares, you're not going to want to buy $200 each week and much better buying in bigger batches to minimise brokerage as much as possible.

 

Not quite.

For the most part (maybe depending on legal structures, etc) PPOR mortgages are paid for from after-tax income. So while your mortgage might only be 4.25% or so, that is after-tax (and after the 2% medicare levy). Which for a 37c in the dollar taxpayer (as an example) converts to a pre-tax equivalent interest rate of 6.97%.

It is still a significantly lower hurdle than in years past though (such as when interest rates were a lot higher).

But - paying down the family home is just about a risk free investment. So whatever else you do doesn't just have to beat 7% (or so) - it has to beat it by a margin that justifies the risk.

Of course, there is a property boom spreading rippling around Australia atm, so with some research on the part of the OP it should be pretty easy to do better than 7%.

But measure twice, cut once as always.

 

Thank you for all your replies. Definitely some food for thought. My wife is very conservative and would rather not have a loan to buy shares at this stage. Do you think it would still be worth opening an investment account with the $200 a week going into it and each time the balànce gets up to say 2 or 3k buying aome shares? Say VAS or BKI or similar?

 

I think the concept has gone over your head a bit. Let me explain with an example.

Option 1
$100,000 home loan. Not deductible.
Pay it down to $80,000 Still not deductible
$20,000 taken from redraw and used to buy shares = deductible.

Compare this to
Option 2
$100,000 home loan
$20,000 in savings used to buy shares

(you would still have the same debt with the 2 scenarios, but with 1 you have saved tax - which you can use to pay off the home loan sooner)

 

Thanks Terry. So is it as easy as just pumping all our extra funds into our redraw facility and when the time is right purchasing shares etc? I was way over thinking it!

 

You need to structure the loan correctly, otherwise the interest will not be deductible - but other than that, yes!

 

As Jess said you have to worry about mixing loan purposes, but on a broad level yes.

See this easy loan structuring technique which may help keep purposes separate.
Tax Tip 13: Simple Loan Structuring Strategy

 

Awesome thanks very much. Will talk to a mortgage broker and go from there.

 

Hi @Phil82

Glad the info helped. Did you notice that @Terry_w who has responded above is a mortgage broker? He'll know precisely what you need to do. Perhaps give him a shout.

 

Would the debt recycling strategy still be advised for someone in an industry the is in a current downturn? I'm an underground coal miner south of Sydney if that helps.

 

Debt recycling is always good as long as the investments are making more than they are costing.

 

Great. In your experience Terry do most people tend to use property or shares to achieve the best results?

 

I mainly see property people because of my work focus, but it works well with shares too. Shares are easy to buy and sell and so can be more effective (as long as they go up in value!)

 

Another question. If I debt recycle does this open me up to some sort of Margin call or the bank calling in the loan if the investment decreases in value? Even if I could still comfortably make the repayments?

 

Only if you are using shares as security for the loan.

 

Hi @Terry_w , I have used debt recycling to fund my first IP via loan splits recently as outlined in your tax tip 13. I'm now planning to use the same strategy (i.e. split PPOR loan by $10K, pay & redraw to invest) and invest in shares via ETF route preferably VAS that tracks ASX 300. Does ETFs qualify for claiming interest deductions just like shares?