With the housing markets booming, property is looking like a very attractive investment. But when you already have a mortgage, is more debt the right answer?
Well, as you know I like the idea of diversification. So, for me a bit of both makes sense: paying extra on the mortgage AND investing. But wait, not so fast! Before you do that, as always, you need to have the basics covered. Don’t start investing until you have three months of emergency savings and are paying off your mortgage at 8% interest. This means in the short term you’ll be taking advantage of low interest rates and paying more off your mortgage, whilst also knowing that if (when!) rates were to rise to 8% you can still afford the repayments, regardless of any other investments you have on the go. Think of it this way, the money put on your mortgage is essentially giving you a tax free, guaranteed return with no risk of 4% p.a. – in this market that’s pretty good!
Here are some considerations:
#1. Will your home become an investment property in the future?
If there is a chance of this happening someday in the future, then it will be more tax effective to keep any extra money you can repay on your loan in an offset account rather than paying down the mortgage. Make sure to talk to your accountant or financial adviser.
#2. If you bought an investment property, could you afford repayments on two mortgages at 8%?
It’s one thing to be able to afford repayments at an interest rate of 8% on one property, but what about two? Rental income is not always enough to cover the mortgage. Then there is the question of what would happen if your tenant was late with their rent or if the property was vacant for a month or two?
#3: Can you purchase an investment property without paying lenders mortgage insurance (LMI)?
If you don’t have a significant enough deposit, or enough equity in your home, you may have to pay LMI which can make a big dent in your savings.
#4 : Do you understand the risks?
Investing while you have a mortgage can be one way of speeding up the repayment of your mortgage – that is, if your investments grow enough in value in a reasonable timeframe. However, you also need to consider the risks associated. Make sure you can afford to ride out any possible storms, like periods of extended vacancy (where you aren’t receiving rent but still need to make repayments) or a slowing market where it takes 10 years or more to achieve any capital growth. Don’t dismiss other forms of investments either – for example managed funds can still give you exposure to property, while also offering the benefit of diversification.
As I’ve said before, the secret to successful investing is ultimately to factor in the worst-case scenario and make sure you can mitigate the associated risks as much as possible. A loss on paper is only theoretical, as long as you can afford to hold onto your investments until the right time to sell! !
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The information provided by Women with Cents is general in nature. It doesn’t take into account your objectives, personal financial situation or needs. Think of it as educational material in which to help you make more-informed decisions. We recommend you obtain financial, tax and credit advice specific to your situation before making any investments or financial decisions.
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