With interest rates so low, should you pay off your home loan or invest? Check out this week’s live Bush Bite for the answer …
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Transcript:
Welcome! Now, with interest rates at historic lows, I’m often asked the question: is it better to pay off my home loan or to invest? So in this week’s Bush Bite we’re going to dig into this and answer this for you.
From a purely mathematical perspective, if the interest rate on an investment after tax is higher than your home loan interest rate, then you’re better off investing. With the current home loan rates at between 2% – 3%, compared to 6% – 8% returns on shares and property, you are 3% – 6% per year better off by investing. Now, this is significant. Remember that by leaving your hard earned money in a savings account, you’re actually losing money and going backwards when inflation is taken into account.
Let’s have a quick look at an example. Let’s say that you’ve got a surplus of about $500 a month to play with and will assume that you’ve got a home loan balance of about half a million or $500,000 and a 30 year loan term. Paying that extra $500 a month off the home loan will knock about 8 years off the term and save you approximately $95,000 dollars in loan interest. That sounds pretty good, but if you compare that with the investment option of putting that same $500 a month into an investment that’s earning around 8% per year, over that same 30 years, you’ll have gained a nest egg of about $800,000 dollars before tax. So we’re comparing $95,000 dollars in saved interest versus $800,000 dollars in your nest egg. I don’t know about you, but that’s an absolute no-brainer. But here’s the real kicker: if you invest in a cleverly structured investment property, the tax savings and the rent can actually help you pay off your home loan years earlier and save you tens of thousands of dollars in interest as well as growing your nest egg.
Now, that’s the best of both worlds! If you’re still not sure, at the very minimum, make sure you look at refinancing your home loan to put $400 dollars to $12000 a month back into your pocket, and then you can decide what to do with it. To find out how this might work for you and to look at your specific situation, make sure you reach out to a savvy mortgage broker and or an accountant to see what’s best for you and your particular situation (and your sleep at night).
That’s the food for thought this week.
Don’t miss weekly Bush Bite live insights on Facebook, Twitter and LinkedIn, go deeper and subscribe at https://bushymartin.com.au!
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