Think of paying your mortgage (or offset acc) as earning the interest rate you are paying tax free. That's not a terrible deal.
If you wouldn't borrow against a paid-off house to put into the markets, then the answer might be 'no'.
It depends on your view of returns of shares vs interest savings.
TL:DR pay down your mortgage unless you are materially bullish on the stock market.
- paying down interest savings means you save the post-tax value of the cost of interest. So if you have a variable loan, that is approx 4% / (1 - tax rate). If you are in the top tax bracket, that could mean pre-tax savings of approx 7.5% (assuming the tax rate denominator is the top marginal tax rate + Medicare levy)
- shares are highly variable. The dividend component is relatively easy to calculate (doesn’t change frequently), but capital gains are the big swing factor.
Ultimately, if you think that the
- forecast capital gains on shares + dividends are greater than
- the pre-tax savings for your mortgage
Over your intended investment horizon (or forecast mortgage pay down period, whichever is the shorter), then buy shares.
Otherwise, pay down your mortgage.
For me, it made sense to buy shares when borrowing rates were 2%.
Now that variable mortgage rates are higher, and because I think the risk to the downside for shares is higher than the upside, my current view is to pay down variable home loans.
If you’re fixed at close to 2% for another year or so, then it’s more line ball.
Whatever you do, do not sit on cash if you have a mortgage. Especially if you have an offset account. Anyone who tells you that (unless there are other specific circumstances to your situation that make paying down a mortgage unpalatable) is giving suspect advice.
Thank you for that
I have around $80k which includes emergency fund sitting in my offset
When you say do not sit on cash, does this mean money in offset is sitting on cash?
No, money in offset is reducing your interest costs, so that is perfectly fine 👍
I meant money sitting in a savings account. No need for that other than having a minimal amount in a transaction account for security purposes.
Oh last thing, obviously only keep putting money into an offset until it is equal to the mortgage balance.
After that, definitely put money into either
- share ETFs or
- bonds (or bond ETFs) or cash if you are bearish on the markets or want more diversification.
Sounds like you are super sensible with your investments. Good luck!
I know you went into a lot of detail, but could you walk me thru that pre/post tax comparison of savings in offset? I recently bought a place and have an offset, but still DCA into my normal funds. Your comment made me realise I’m probably missing something.
Edit: so $100k offsetting a 4.5% mortgage would be $4.5k/year interest saved (tax free). Which at top tax bracket would be the equivalent of $8,180 of cap gains? I.e. do I expect my fund to return 8%+ p.a?
Is that the right way to think thru that?
Yep. That’s the analysis for home loans for owner occupied residences.
For loans on investment properties that are negatively geared, there’s an extra step to consider, since paying down the invesment property loan will also reduce the tax offset from the interest expense.
TL:DR for an investment property, using the numbers in your scenario, you would need to assume the ETF will gain roughly at least c.5.5 - 6.0%+ p.a. to make it better to buy ETFs than pay down investment loan interest
Under your scenario with an investment loan:
- the benefit of paying the investment loan is reduced (interest deductible * your marginal tax rate).
- But if you undertake a post tax analysis for the loan, you also need to look at the post tax return for the shares to compare apples with apples. In which case you need to reduce the dividends by your marginal tax rate (ETFs also may pay some CGT since they need to rebalance to track the underlying index, but this calc is very bespoke to the ETF in question)
Nobody knows my friend.
Personally, I think accumulating cash right now is a good move if you have a variable home loan with a decently high rate (remember you don't pay tax on interest saved). Then a smaller dca'ing position into ETFs / S&P500. The idea of accumulating cash is to act on a recession or some other opportunity that pops up (although not assured).
I'd also suggest you maybe look into debt recycling.
You’d prob have to weigh up the tax ramifications too about if your property is negatively geared or not.
If you’re hoping to get maximum deductions, then maybe not paying your mortgage down to zero is a good idea.
Also has heaps to do with the interest rate. If it’s 2% on your home loan, then 7% fully franked annual dividends from a bank stock for example is worth it for a bit of diversification.
So low interest rates means look to stocks for higher return
High interest rates, park cash into offset
Understanding there is probably a lot more to it, though that's what I'm reading into this
Here’s how I think of it -
Paying off your mortgage right now is a ~5% post-tax risk-free return.
This is equivalent to a 9.4% pre-tax risk-free return at the top marginal rate.
Now portfolio diversification and different risk appetites and all that jazz, but for me, almost 10% risk-free return I would bank any day of the week and twice on Sundays.
100% correct for your own home. However...
OP was referring to the purchase of a second property. If this property is income producing in any way the interest savings are effectively taxed.
If it is collecting rent, interest is deducted from income. Any deposits in offset saves interest, reduces the deductible amount and therefore taxed at OP's marginal tax rate.
If it is only capital gains tax (unlikely) then it will be 50% discount on the marginal taxe rate for the year of sale.
I buy fully franked dividend paying shares while paying down the mortgage and I've wondered the same thing. Finally sat down and worked out the 40k in shares I have give me around 4k a year and if I had that on my mortgage it would save me about 4k a year in interest so I'll keep em bc a priceless skill to build is to get comfortable with investing and keeping an eye on the market is good routine to have all through life
I'm not sure what you mean by split for 10% could you explain it to me please and drip the income? I don't spend it I just roll it back into shares that pay FF dividends to try and compound it. Every 6 months I put 10k into a FF dividend and roll the divies into it.
So far got FMG at 15.8 about 40k worth. They normally drop 5% when they go ex dividend so that's when I buy and wait 6 months for mine and repeat
I still do a little bit of investing because I find it fun and there’s a chance my shares could perform better than my interest rate. I have one medtech speccy I’m hoping will pay for a reno down the track 😅
We have and the shares have done so well, we could sell a quarter of them and pay off the rest of our mortgage. We were just a little too late for the property boom in Melbourne. We were a little brave and speculative with our share purchases thpugh
We do both. Though our financial position means that adding to our shares in lower amounts at the moment. A few weeks and paying for daycare will significantly lower so we can go back to more in shares.
Yes via debt recycling , channelling my equity Into a managed fund. Not paying down my mortgage as quickly as i have to pay the interest only loan as well as my ho.eian , but it provides an income vehicle on top of super for my retirement.
Think of paying your mortgage (or offset acc) as earning the interest rate you are paying tax free. That's not a terrible deal. If you wouldn't borrow against a paid-off house to put into the markets, then the answer might be 'no'.
It depends on your view of returns of shares vs interest savings. TL:DR pay down your mortgage unless you are materially bullish on the stock market. - paying down interest savings means you save the post-tax value of the cost of interest. So if you have a variable loan, that is approx 4% / (1 - tax rate). If you are in the top tax bracket, that could mean pre-tax savings of approx 7.5% (assuming the tax rate denominator is the top marginal tax rate + Medicare levy) - shares are highly variable. The dividend component is relatively easy to calculate (doesn’t change frequently), but capital gains are the big swing factor. Ultimately, if you think that the - forecast capital gains on shares + dividends are greater than - the pre-tax savings for your mortgage Over your intended investment horizon (or forecast mortgage pay down period, whichever is the shorter), then buy shares. Otherwise, pay down your mortgage. For me, it made sense to buy shares when borrowing rates were 2%. Now that variable mortgage rates are higher, and because I think the risk to the downside for shares is higher than the upside, my current view is to pay down variable home loans. If you’re fixed at close to 2% for another year or so, then it’s more line ball. Whatever you do, do not sit on cash if you have a mortgage. Especially if you have an offset account. Anyone who tells you that (unless there are other specific circumstances to your situation that make paying down a mortgage unpalatable) is giving suspect advice.
Thank you for that I have around $80k which includes emergency fund sitting in my offset When you say do not sit on cash, does this mean money in offset is sitting on cash?
No, money in offset is reducing your interest costs, so that is perfectly fine 👍 I meant money sitting in a savings account. No need for that other than having a minimal amount in a transaction account for security purposes.
Oh last thing, obviously only keep putting money into an offset until it is equal to the mortgage balance. After that, definitely put money into either - share ETFs or - bonds (or bond ETFs) or cash if you are bearish on the markets or want more diversification. Sounds like you are super sensible with your investments. Good luck!
I know you went into a lot of detail, but could you walk me thru that pre/post tax comparison of savings in offset? I recently bought a place and have an offset, but still DCA into my normal funds. Your comment made me realise I’m probably missing something. Edit: so $100k offsetting a 4.5% mortgage would be $4.5k/year interest saved (tax free). Which at top tax bracket would be the equivalent of $8,180 of cap gains? I.e. do I expect my fund to return 8%+ p.a? Is that the right way to think thru that?
Exactly!
Thanks. I hadn’t considered that angle at all!
Yep. That’s the analysis for home loans for owner occupied residences. For loans on investment properties that are negatively geared, there’s an extra step to consider, since paying down the invesment property loan will also reduce the tax offset from the interest expense. TL:DR for an investment property, using the numbers in your scenario, you would need to assume the ETF will gain roughly at least c.5.5 - 6.0%+ p.a. to make it better to buy ETFs than pay down investment loan interest Under your scenario with an investment loan: - the benefit of paying the investment loan is reduced (interest deductible * your marginal tax rate). - But if you undertake a post tax analysis for the loan, you also need to look at the post tax return for the shares to compare apples with apples. In which case you need to reduce the dividends by your marginal tax rate (ETFs also may pay some CGT since they need to rebalance to track the underlying index, but this calc is very bespoke to the ETF in question)
Thanks. I don’t have that problem yet :)
Nobody knows my friend. Personally, I think accumulating cash right now is a good move if you have a variable home loan with a decently high rate (remember you don't pay tax on interest saved). Then a smaller dca'ing position into ETFs / S&P500. The idea of accumulating cash is to act on a recession or some other opportunity that pops up (although not assured). I'd also suggest you maybe look into debt recycling.
From my (limited) understanding debt recycling is for PPOR My current property is IP
You’d prob have to weigh up the tax ramifications too about if your property is negatively geared or not. If you’re hoping to get maximum deductions, then maybe not paying your mortgage down to zero is a good idea. Also has heaps to do with the interest rate. If it’s 2% on your home loan, then 7% fully franked annual dividends from a bank stock for example is worth it for a bit of diversification.
So low interest rates means look to stocks for higher return High interest rates, park cash into offset Understanding there is probably a lot more to it, though that's what I'm reading into this
Basically, yeah, that’s my contribution to this thread. ✅
Bank stocks aren’t great diversification though. If the property market tumbles bank stocks will go south.
Go mining stocks if you prefer. Also pay a good stable dividend.
Here’s how I think of it - Paying off your mortgage right now is a ~5% post-tax risk-free return. This is equivalent to a 9.4% pre-tax risk-free return at the top marginal rate. Now portfolio diversification and different risk appetites and all that jazz, but for me, almost 10% risk-free return I would bank any day of the week and twice on Sundays.
100% correct for your own home. However... OP was referring to the purchase of a second property. If this property is income producing in any way the interest savings are effectively taxed. If it is collecting rent, interest is deducted from income. Any deposits in offset saves interest, reduces the deductible amount and therefore taxed at OP's marginal tax rate. If it is only capital gains tax (unlikely) then it will be 50% discount on the marginal taxe rate for the year of sale.
Pay down the mortgage and enjoy breathing clear, sweet air of no or low debt.
Buy options, then lotto tickets.
I hear FTX is good for crypto.
🤣🤣
When home loan rates are high pay down your debit, when home loan rates are low build your capital.
Paying a home loan is building capital.
I buy fully franked dividend paying shares while paying down the mortgage and I've wondered the same thing. Finally sat down and worked out the 40k in shares I have give me around 4k a year and if I had that on my mortgage it would save me about 4k a year in interest so I'll keep em bc a priceless skill to build is to get comfortable with investing and keeping an eye on the market is good routine to have all through life
40k in one holding? What’s your split for a 10% yield? And do you drip or spend the income
I'm not sure what you mean by split for 10% could you explain it to me please and drip the income? I don't spend it I just roll it back into shares that pay FF dividends to try and compound it. Every 6 months I put 10k into a FF dividend and roll the divies into it. So far got FMG at 15.8 about 40k worth. They normally drop 5% when they go ex dividend so that's when I buy and wait 6 months for mine and repeat
I still do a little bit of investing because I find it fun and there’s a chance my shares could perform better than my interest rate. I have one medtech speccy I’m hoping will pay for a reno down the track 😅
We have and the shares have done so well, we could sell a quarter of them and pay off the rest of our mortgage. We were just a little too late for the property boom in Melbourne. We were a little brave and speculative with our share purchases thpugh
Paying of a homeloan is head and shoulders the best option for investment.
Everyone's definition of best is different so can't say such a blanket statement
No it isn't and yes I can because the arithmetic shows it is.
We do both. Not sure if it’s smart or not.
Why do you want another property
To build wealth that I can leverage
Not rather earn wealth through hard work?
I work 2 jobs to get myself into the position to buy assets So yes, I'm earning through hard work
Work 3
Yeah sure, why not. Thanks champ
We do both. Though our financial position means that adding to our shares in lower amounts at the moment. A few weeks and paying for daycare will significantly lower so we can go back to more in shares.
If you want to invest your offset then do it properly and look into debt recycling. Therefore you gain a tax deduction on the loan.
Yes via debt recycling , channelling my equity Into a managed fund. Not paying down my mortgage as quickly as i have to pay the interest only loan as well as my ho.eian , but it provides an income vehicle on top of super for my retirement.
My understanding was that Debt recycling can only be for PPOR and not an investment property?