Making extra mortgage repayments is a sensible decision because it allows you to reduce your loan balance and maximise your equity.
The dilemma that many homebuyers face is deciding whether to pay off your home loan completely before taking advantage of property investment opportunities.
When can I invest in property?
There is no right time to buy an investment property but there are certain factors that should influence your decision:
- You owe less than 80% of the property value on your home: Depending on the value of your home and your loan balance, you may be in a position to release equity as a deposit to buy a new property.
- Your lender will allow you to refinance: Accessing equity requires you to refinance your home loan so be aware that you may incur a break cost when changing your loan terms within a fixed period.
- You have sufficient cash flow: Property is typically a more secure investment but it is not set-and-forget so be sure that you have savings in place or funds in your offset account to cover unexpected costs such as maintenance and repairs.
- Your financial situation will remain unchanged: Depending on your income situation, consider whether immediate plans can be put on hold including taking holidays, changing jobs, having another child, repairing or extending your home, or buying a new car.
Call us on 1300 889 743 or fill in in our online enquiry form.
One of our mortgage brokers can assess your financial situation in full and let you know if you qualify for an investment loan.
Already have a property in mind?
Provide us with the address and we can find out the indicative property value.
We can then ask you how much you’re looking to borrow and run through some figures on how much it will cost to own an investment property.
In this way, you can make a more informed decision as to whether now is the right time to buy or whether you are better off continuing to pay down your mortgage.
The pros of investing in property
Avoid opportunity cost
There is a concept known as “opportunity cost”.
In a rising market, it is usually a good time to identify growth areas, locations that are currently undervalued but have the potential to grow rapidly.
Passing up these opportunities now in favour of making extra repayments or increasing your savings buffer may mean that you’re locked out of the market in the future.
Build your wealth
Property and superannuation are still the major contributors to retirement savings in Australia so why not get a headstart during your wealth accumulation phase?
Apart from retirement, building up your equity through property investment means you can more easily leverage these funds to purchase more than just real estate.
For example, purchasing a family car, undertaking renovations or capital improvements on your home, paying for a wedding or even going on a holiday.
Investment and equity loans are known as “good debt” because they are lower interest loans.
This is compared to higher interest facilities like personal loans, car finance or credit cards, which are considered “bad debt”.
Avoid the risks of other investment types
Investing in the stock market can potentially be a cheaper option but property, historically, provides more security on return.
The other benefit is that you can always sell the property for a profit if you find that you’re struggling to make the repayments.
In the first few years of owning an investment, you may find that you are spending more on your loan repayments, council rates, maintenance costs and other fees than what you are returning in rental income.
Any losses you incur owning an investment property are tax-deductible and can be claimed through negative gearing.
It is essential you seek tax advice from a qualified accountant.
Should I invest sooner rather than later?
There is no hard-and-fast rule.
Some argue that continuing to make extra repayments at the 10-year mark is not as effective as it would have been previously.
Should you wait 10 years to invest?
Not necessarily and you have to consider time in the market as opposed to timing the market.
Paying an extra $200 into your mortgage can save you almost $160,000 in interest and shave more than 8 years off a $500,000 mortgage (5.50% p.a.).
Sounds great but wait!
You could instead borrow $400,000 to purchase a $500,000 investment property and find that in 5 years, the price increases to $800,000.
If you were to sell the property making minimum repayments on the investment loan, your return on investment may be upwards of $460,000.
Am I better off making extra repayments?
The main benefits of making extra repayments are to:
- Reduce the length of your loan term.
- Reduce the overall interest bill.
- Maximise your available equity by reducing your Loan to Value Ration (LVR).
Specifically, paying more into your home loan may be more beneficial to you if:
- You have trouble with spending, in which case, setting up extra scheduled repayments may be in your best interests.
- You have a large loan balance and you are nearing retirement, in which case, paying down your mortgage fast may be the better option.
- Your home loan debt is higher than other debts you have and you are unable to negatively gear because it is your owner-occupied property.
- You want to release your parents as guarantors.
The main problem is that when you pay extra directly into your mortgage, you are unable to access these funds if and when you need them.
An offset account gives you the best of both worlds
By instead making extra repayments into an offset account, you can reduce your interest payments by effectively reducing the principle on your loan.
The beauty of an offset facility is that you can access the funds in the account if and when you need them, such as a family emergency or when your financial situation suddenly changes.
You also free up your cash flow so you can take advantage of an investment opportunity when it arises.
Many homeowners simply use it as their everyday transaction account.
A redraw facility has the same benefits but with a few limitations:
- You will typically be charged for each withdrawal.
- There is usually a minimum amount per withdrawal.
- You may be limited to how many withdrawals you can make per year.
The redraw facility is ideally more suited to borrowers who want the option to redraw but really have no immediate need for an everyday account where they can easily access extra repayments.
It really comes to personal choice, how you manage your finances and your financial goals.
Planning to invest in property soon?
There is always a balancing act between paying down your mortgage fast and maximising your equity, and quickly acting to advantage of investment opportunities.
Call us on 1300 889 743 or fill in our online enquiry form today.
Our mortgage brokers cannot provide you with specific financial advice but we can assess your current situation and guide you toward making a decision that is right for you.