The great debate: Pay off your mortgage or invest in shares?

first_imgBrisbane-based finance guru and QUT adjunct professor Noel Whittaker. Picture: AAP/John Gass.“Provided you intend to keep your house for a long time. any spare money you have should be used to pay off the loan because that increases your equity, which you can then borrow against to buy property or shares. “I prefer shares because the name of the game is diversification, and seeing you already have a big chunk in residential property, I’d advise going for shares.“If you buy a property investment, the key is to add value, and you can’t add value if it’s a brand new house or apartment.” The great debate: pay off your mortgage or invest in shares or more property?IT’S a common dilemma.You’ve been working hard, and between rising power prices and low wage growth, you’ve somehow managed to save a decent amount of dosh.Now you find yourself asking the question: Do you use it to put a dent in your mortgage (if you have one) or do you invest it in the sharemarket or more property?Omniwealth senior financial planner Andrew Zbik recently took on a client who was faced with the same quandary.They had saved $300,000 and had a $600,000 non-deductible home loan. At the current interest rate of 4.5 per cent, the loan had principle and interest repayments of $3493 a month. Ominwealth senior financial planner Andrew Zbik. Picture: AAP/Julian Andrews.The client sought advice from another financial planner about what to do with their savings and were advised to invest it in a combination of managed funds, rather than put the money towards the mortgage.“To pay off the home loan over the next twenty-three years, my new client will have to make total loan repayments of $964,158 back to the bank,” he said. GET THE LATEST REAL ESTATE NEWS DIRECT TO YOUR INBOX HERE “They are on the second highest marginal tax rate. Therefore, they will need to earn $1,593,650 over the next 23 years to have enough income after tax to pay back $964,158 to the bank for the $600,000 that is currently owed on their home.” What’s the better investment strategy? Pay off your mortgage or invest in shares or more property? Photo: Luis Enrique Ascui.Mr Zbik said he would have recommended using the $300,000 to reduce the home loan debt, which would have reduced the monthly principle and interest loan repayment, saving the client more than $180,000 in repayments.“With the new equity in the home, we may use this as a deposit towards an investment property or to draw new debt and purchase a diversified investment portfolio,” he said. “If we were to redraw $300,000 to invest in the exact same investment portfolio all the loan repayments would be tax deductible. Tenants from hell on the rise Mortgage stress continues to rise More from newsMould, age, not enough to stop 17 bidders fighting for this homeless than 1 hour agoBuyers ‘crazy’ not to take govt freebies, says 28-yr-old investorless than 1 hour ago Brisbane’s most in-demand suburbs “The end position would be very similar. My clients will still have a $300,000 investment portfolio. They will still have around $600,000 debt.“The significant difference is that half of that debt would now be tax-deductible because my clients have halved their non-deductible principle and interest home loan repayments.”Finance guru and QUT Business School adjunct professor Noel Whittaker agrees using the money to pay down your mortgage is the best first step.“First thing, get your mortgage under control,” he said. “I think at least for every $100,000 of your mortgage, you want to be paying at least $900 a month.” What’s the better investment strategy? Pay off your mortgage or invest in shares? Picture: Brad Hunter.But if you ask stockbroker Marcus Padley, shares are lot less hard work than property.“When you buy BHP shares you don’t have to fix the loo, send them $45,000 to renovate or worry about that finders fee, the real estate commission, stamp duty and legals,” he wrote recently. But he also believes it’s ultimately a personal decision.“If you are good at equities, which are hard, stick to equities,” he said.“If you know the property market stick to property. I have both.”Bessie Hassan, money expert at, said both servicing a mortgage (beyond the minimum repayment) and investing in shares could yield attractive returns, but it was important to consider the downside of each option.“Channelling money towards your mortgage in the form of extra repayments can save you thousands of dollars in interest,” she said.“However, throwing extra funds towards your mortgage could mean you lack a diversified strategy as your wealth will be tied up in the residential property market. “This means you could leave yourself exposed if property prices dampened or the market took an unexpected U-turn.“However, like the property market, shares are also susceptible to ups and downs, and shares are also subject to income tax.”last_img

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