Investments Vs Home Mortgage

Question:

Should excess savings be used for investment or other wealth creation purposes as opposed to utilising it for an existing home loan? 

Answer:

There is no one best answer, however when trying to work out what is best for you, please consider the following.

Investments to Consider include:

• Direct and indirect property (positively or negatively geared)
• Equities (stocks)
• Corporate bonds (Government bonds are not a likely investment when there is still a mortgage because of their low risk low return nature they are rarely a more effective option)

Depending on your risk profile additional savings could be coupled with additional borrowings. Sources of borrowing worth considering include:

• A line of credit secured against the home
• A new loan secured against an existing property
• Margin Lending
• Borrowing in a SMSF

Wealth Creation strategies to consider include:

• Debt recycling strategies used in conjunction with investments
• Government Superannuation co-contribution
• Spouse Superannuation contribution tax offset
• Superannuation salary sacrifice especially when employers match additional contributions
• Using investment structures to minimise tax and maximise asset protection

Depending on the investment and/or wealth creation strategy undertaken factors to consider include:

• Your risk appetite
• The interest rate(s) of your current mortgage
• Expected net of tax investment returns versus cost of funding
• Current and future incomes and marginal tax rates of you, your spouse and your children
• Your views of superannuation legislation risk
• Expected future cash flows: e.g. private school fees, inheritance etc;
• Your health
• Your job and income security
• Your levels of personal insurance
• The disadvantages of putting additional money into superannuation today that cannot be accessed until a condition of release is satisfied