Welcome to Finance and Fury, the Say What Wednesday edition.

This week’s question is from Scott:

“Hi Louis,

I am currently in my 30s and have recently bought my first home. I would like to get your view if I should take advantage of low interest rates and start to put additional funds into my mortgage or if I should be thinking long term and investing instead. My mortgage is around $580,000 and I would like try to get this paid off as soon as possible but at the same time, know that investing could put me in a better position. Would love to get your thoughts on this.”

Great question – Invest or pay off debts –

This episode is general in nature – This isn’t personal advice – look at the pros and cons of paying off debt versus investing – look at the opportunity cost of each situation

  1. What is the right thing to do? Depends on your goals and financial position – one strategy isn’t right for everyone
    1. Someone in their 20s – may be better to invest – have long timeframe for funds to grow –
    2. Someone in their 50s – may be better to pay debt
  2. First step is to look at your overall levels of debt –
    1. Not talking investment debt here – but bad debts – the non-deductible debt – costs cashflow and has a negative compounding return from the interest
    2. Also depends on how much debt you have and your LVR – if you have no savings – better to save a little before investing
    3. Example – if you have bought your PPR for $600k – but have $550k of mortgage on this – might be worthwhile to focus on debt repayment for a little while –
      1. Put yourself back into an 80% LVR – protect from the bank coming for your house if values went through a massive decline
      2. Also – have the potential to refinance for a better rate – sometimes banks can give you a worse rate if you are seen as too much risk
    4. Say you are on a decent interest rate and have an LVR of below 80% – what is best to do

Concept of hurdle rate – this changes over time – based around interest rate movements versus long term return potentials

  1. Question – What is the minimum benchmark for opportunity costs?
  2. You want your money to work for you – so need to price it into the equation –
    1. Little point saving at the moment beyond having enough in emergency funds
  3. So what is your opportunity cost for your money? Say it is 5% p.a. – then mortgage repayment at the moment is below this level
    1. Interest costs versus return potentials
    2. Interest costs are to your income only – Debt levels don’t grow
    3. Investment returns also change – have an income level but also growth –
  4. Have to take into account the potential for inflation –
    1. Inflation is your friend if you have debt
    2. Inflation is not your friend if you have cash savings or an investment
    3. Both situations eats away the real returns
  5. Current situation – Low interest rates, low inflation, uncertainty in the markets –
    1. But any strategy is long term – but has to adjust over time –
    2. The long term outcomes focus here – given in your 30s – long term game – mortgage has a 30 year timeframe

Looking at the options –

  1. Investing – two options here – Personal or super through salary sacrifice
    1. Personal investing – would need to select funds that can be invested on a monthly basis
      1. Or alternatively – save up lump sums against your mortgage in an offset account and then invest once you reach a level
    2. Salary Sacrifice – put funds into super pre-tax – would gross up the level overall – depends on your own personal income
      1. Or if you are in a low income bracket – or a partner or spouse is – below the $38k p.a. level – can place in funds to super as a non-concessional – $1k gets the $500 bonus
      2. But super would only be an option if you are either getting closer to retirement or don’t mind going without the funds until preservation age – so would by 20+ years
    3. Extra Mortgage repayments – Offset accounts versus paying down the mortgage
      1. Lets say that you have an interest rate of 3.5% p.a. on the $580,000 – total repayments of $2,608 p.m.
      2. Interest costs of repayments would be $1,692 p.m. – total interest cost of $356,600 over 30 years

Examples – Say you have spare cashflow of $2k p.m. = $24k p.a.

  1. Mortgage repayment – put $2k p.m. onto the loan – reduce your mortgage down to about 13.5 years from 30 year period – you would save $212,805 in interest
  2. Investing in a fund – gets 8% p.a. on average – put in $2k p.m. – same time period of 13.5 years (162 months)
    1. Total investment value is $584,112 – however similar to the mortgage you have contributed funds –
    2. Contributed funds is $324,000 – The growth in assets is $260,112
  3. So the difference – interest saved versus the growth of the investments
    1. Interest of $212,805 versus growth of $260,112 = $47,307 in additional value

But what happens after this?

  1. 14 years’ time – you have a mortgage paid off – or around $400,000 left on the mortgage if you keep making the minimum repayments
    1. Now you have another choice – keep investing or make additional debt repayments
  2. Say from the 14 year mark – if you have your mortgage paid off – you can put $4,608 into an investment now that your mortgages are paid off – or the other scenario – you don’t have the mortgage paid off – keep making the $2k p.m.
    1. Investing in 14 years at greater level = $1,897,510 in 30 years
      1. Taking into account the interest saved of $212,805 – total value is $2,110,315
    2. Or keep on the original path by making $2k p.m. = $3m invested
    3. So almost a $900k difference over 30 years
  3. Present value of situation – assuming inflation of 2.5%
    1. Repaying mortgage then investing = $897k
    2. Investing along the way = $1.42m
  4. Passive income point of view – assuming a 5% income yield off the investments
    1. Income of $150k versus $95k – both scenarios the mortgage is paid off and one has a higher income –
    2. Assuming no super here – which would boost the income on top of this
    3. Over 30% more income personally

So what is best? Based around the numbers – investing

  1. As long as you have enough in the offset or LVR is low enough – investing
  2. A lot of it comes down to individual situation and preferences
    1. If you have 30 years and time on your side – helps to get the most into investments now to grow over time

Hypothetical – say interest rates kick back in – goes up to 5% – obviously interest payments would go up

  1. Interest costs would go to $540k for the life of the loan – up from $356,600 – so making additional repayments – would save $332k as opposed to $212k
  2. Say interest rates go further – The break even for hurdle rate would be around the 7% to 8% p.a. mark –

Shouldn’t be set in stone – have to be flexible to the world around us – but at this stage – monthly investing based around some illustration examples would provide a better long-term outcome

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/

Fractal property investments: dipping your toe into the property market

Episode 19 Fractal property investments: dipping your toe into the property market It’s no secret that property is expensive in Australia – it can be pretty disheartening for those trying to get into the property market especially if you’re trying to buy your first...

Is Bitcoin the future of money?

Welcome to Finance and Fury, the Furious Friday edition Been talking about monetary system – today dive into Crypto currency Crypto currency – means nothing - has to do with individual coins/tokens/whatever –   Preface – Don’t have as deep an understanding on the...

Is it time to rethink monetary policy? A question from Ross

Welcome to Finance and Fury, the Furious Friday edition. Today is more a Say What Wednesday episode, I need to catch up on some of your questions and this one fits in nicely. This is a question I got from Ross about rethinking monetary policy. “Am currently reading...

Say What Wednesday: The tax implications of investing in shares; owning, holding, selling, dividends

Say What Wednesdays The tax implications of investing in shares; owning, holding, selling, dividends Welcome to Finance & Fury’s ‘Say What Wednesday’! Today’s question is from John; What are the tax implications of investing in shares, owning, holding, selling,...

Say What Wednesdays: Should I lock in a fixed rate on my home loan with interest rates so low?

Say What Wednesdays Should I lock in a fixed rate on my home loan with interest rates so low? Welcome to Say What Wednesdays – Where we answer your questions about personal finance and the economy! This week’s question comes from Michael. His question related to...

Cannibalism, Nazism and property rights

Furious Friday - Part 2 Cannibalism, Nazism and property rights Welcome to Part Two! If you haven't already...listen to Part 1 before jumping into this episode Let’s look at these claims: Means of production owned by the public or state This removed property rights –...

Is it still viable to set up an off shore investment company or have most of the advantages largely disappeared through inter-government transparency?

Welcome to Finance and Fury, the Saw What Wednesday edition, where every week we answer questions from each of you. This week’s question is from Adam: “Hi Louis - Really enjoy your podcasts.  Not sure if this is too outside of your comfort zone but I would be really...

Introducing the great reset and what is on the agenda of the World Economic Forum.

Welcome to Finance and Fury, the Furious Friday edition. I hope you are all going well. This episode is all about “the great reset”. It sounds like some weird, out there agenda, but it is carried out by some of the most influential organisations on earth. I want to...

Property Boom, or Doom and Gloom? Understand property bubbles and crashes so you can stop being freaked out by the media

Say 'What' Wednesday Property Boom, or Doom and Gloom? Understand property bubbles and crashes so you can stop being freaked out by the media This week’s Say ‘What’ Wednesday is from my friend Adam. We were talking on the weekend about Harry Dent’s recent visit He...

What types of superannuation accounts allow you to control your investments?

Welcome to Finance and Fury, the Say What Wednesday edition. This week, the question comes from Andrew: "Last episode you mentioned super and a product that lets you invest in third party platforms. Would like to hear more about that." What is super? Most people think...

Pin It on Pinterest

Share This