I’m 35 with a $150k mortgage. Should I pay it off ASAP, or invest elsewhere?
I am 35 years old and I have my own apartment. I recently received an early inheritance from my parents as a contribution towards my mortgage. This left me with a relatively small mortgage of $150,000.
Considering my age, should I focus on paying off the mortgage as quickly as possible to stay mortgage-free? Or should I use my savings to invest elsewhere? in my retirement fund or in an ETF portfolio?
The first thing to note is that there is no definitive wrong answer here. This largely depends on your risk appetite and goals.
If you focus on paying off your mortgage, you’re guaranteed to save money on the interest rate on the debt. Currently, this rate is around 6 percent and, unlike investments, there are no tax consequences. Reducing your debt or even becoming completely debt-free also increases your resilience and gives you extra flexibility in life.
However, as you mentioned, perhaps you can reduce your repayments as your mortgage debt decreases and transfer this money elsewhere.
Depending on your income level, current pension balance and retirement plans, it may be worth sacrificing some pension benefits as this will save taxes and strengthen your retirement outcomes. The trade-off with retirement is that you lose access to your money until at least age 60, so you need to consider your need for flexibility here.
Non-super investments always have the advantage of access. Now that you have plenty of equity in that property, you can borrow again against your flat and use it to kick-start a new investment; The investment income is then used to make additional repayments on your home loan.
This is a process known as debt recycling, and although it is sometimes oversold as a strategy in my view, it can still produce positive results if you have an appropriate time frame and a well-structured investment portfolio, especially for those in the upper marginal tax bracket.
I am a 51-year-old single mother with two children (16 and 18). I make $94,000 a year and have a $220,000 mortgage on my house (my house is worth about $830,000). I have $160,000 in super and $380,000 in shares.
What do you think I should do about building my financial future? Would you recommend I sell some shares to reduce my mortgage? I feel like I need to take some action but I have no idea where to start.
Assuming you don’t find regular payments on your mortgage too challenging, then selling shares to reduce that debt doesn’t strike me as an obvious strategic move.
Doing this is likely to trigger capital gains tax on shares, which will reduce the amount that can be paid on a mortgage to save on the cost of interest.
Judging by the numbers you gave, retirement seems like where you should focus your attention. Perhaps you can use dividends from your stock portfolio to help with living expenses and then sacrifice your retirement income from your salary.
This will boost your retirement savings in a tax-efficient way. Also check the investment option in your retirement fund. You have more than nine years, so you can afford to be aggressive.
Post-retirement, when your income is low, you may explore selling some shares and increasing your pension; Capital gains tax considerations are at the forefront in determining the most appropriate solution.
Paul Benson is a Certified Financial Planner. Guidance Financial Services. He is hosting Financial Autonomy podcast. Questions: paul@financialautonomy.com.au
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.
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Paul Benson is a Certified Financial Planner and host of the Financial Autonomy podcast.
