Invest or pay off your mortgage?
Over the years it has almost become expected that once you get a job, you should slowly save as much money as you can until you can put a deposit down and buy your first home. You then slowly pay off your mortgage putting in any extra you can to pay it off as quickly as possible over the next 10-30 years. But is this still the best and quickest route to financial independence? We’ll go through and look at other strategies that could prove to be just as good, if not better.
The home loan
Firstly, let’s look at how a home loan with today’s interest rates will affect you. Current interest rates as of February 2021 for a 30 year loan are around 2.5%. This means that for every $100,000 you owe on your home loan you will be charged $2,500 per year in interest. In the year 2000, interest rates were around 8%. So, for a $500,000 mortgage you would now be paying $12,500 in interest per year compared to $40,000 back in 2000. This is an astronomical difference and shows that these days it’s much easier to service a home loan than it was in the past.
With interest rates and repayments so low, it could be more beneficial to put money into other forms of investments that give you a higher return than the amount of interest charged on your home loan.
Term deposits
Term deposits still have a place and are appropriate in certain circumstances, especially for those who are risk averse or are saving for a short to medium term goal. However, with current term deposit rates at around 1%pa, term deposits are going to give you a lower rate of return than reducing your home loan.
Savings accounts
These accounts have a typical interest rate of 0.5% or less giving them an even lower return than term deposits. Savings accounts offer greater flexibility in terms of deposits and withdrawals than term deposits. However, this form of investment is also going to give you a lower rate of return than reducing your home loan.
An alternative to a savings account is a home loan offset account, which rather than paying interest, will reduce the interest on your home loan. This option allows the flexibility of a savings account with a higher rate of return, the equivalent of reducing your home loan.
Shares
The last 30 years has a seen an average Australian share market return of 9.05%pa. Investing in shares could provide a higher rate of return than reducing your home loan but carries significantly more risk. There is a risk of short term negative returns which could see the strategy of reducing debt more successful in the short term, however the share market has a long term upward trajectory which may be a suitable option for those with long term investment time horizons.
The verdict?
Of all the options listed above, investing in shares may be the way to go, providing a good financial alternative to making extra repayments on your mortgage. However, be aware that the above is based solely on general figures taken from each investment sector and in no way takes into account any one persons individual circumstances. Before making any financial decision it’s important and recommended to seek personal financial advice to ensure it’s the best way forward for you and your personal situation.
If you would like to find the best way of moving financially forward, don’t hesitate to contact us at Solace Wealth Management and we can discuss your personal circumstances and come up with a plan that suits your needs.
You can be confident in knowing that the strategy you end up choosing will be the most appropriate in your individual circumstances. Contact us at Kate@solacewealth.com.au or 0423 313 486.
Kate Trost
Senior Financial Adviser and Director of Solace Wealth Management (AR numbers 465078/1262350)
Authorised Representative of Avana Financial Solutions (AFSL 516325).
