LinkedInFacebook

Owning a home is a coveted dream for most of us. But, is it enough to serve you in your twilight years?

Most home buyers use any additional funds they might have to pay off their mortgage sooner. Many others prefer to take on additional debt instead and buy an investment property to grow their wealth. Both the strategies have their pros and cons, and your choice largely depends upon your risk appetite and your income as well.

 
Should you pay down your mortgage or buy an investment property?
 

For example, if you can spare $100 each week to put towards your mortgage as additional repayments, you can quickly erase the years from your term and save money in interest as well (Calculate your savings with this additional repayment calculator). However, instead of paying down your mortgage, if you invest this money into a well-researched investment property, you could potentially generate much more wealth in the long run, thanks to the inflating property prices. Besides, you can build a stream of passive income through rent from a positively-geared property.

But, wait, there’s a catch here. The above scenario is true only if you invest in a positively geared property that pays for itself and also generates extra cash that you could use to pay down your mortgage. And while you can make an educated guess about a property’s yield, there is always a risk factor involved because, at the very best, your choice is but an educated guess. So, it all boils down to two things – your appetite for risk and your cash flow at the time you decide to buy a second property.

According to experts, you need to think and crunch the numbers before borrowing money to purchase a second home or investment. It is possible you have built enough equity in your house, but, if you don’t have the cash flow to service a second mortgage, steer clear of it. Buying a property assuming it would fund itself could be foolhardy. On the other hand, even if you have very little equity in your house but have adequate cash flow each month to service additional debt, investing in a second property could be an option for you.


Jane and John purchase a second home

Jane and John are in their mid 40s. A few years back they purchased a home worth $800,000. Currently, they owe $600,000 on their home loan. A financially disciplined couple, they have been stowing away their savings in an offset account linked to their mortgage, helping them save a lot of money in interest. Last they checked, they had $80,000 in their offset account.

Both Jane and John want to build their wealth before they retire. After speaking to a few friends and experts, they decide to purchase a small investment property worth $400,000. To fund this property, they can use the money in their offset account as a deposit. Besides, they can also leverage some of the equity in their home to fund the additional costs such as stamp duty and other upfront charges.

The couple seems to have made a smart choice. Alternately, they could put down the additional money towards paying off their mortgage rather quickly, but without building a source of extra income.

In case you are wondering what is a better option for you, note that everyone has different goals and circumstances. What seems to be a good choice for Jane and John might not be the right choice for you. The decision to pay off your mortgage faster or take an investment loan purely depends upon your financial condition and future goals.

If you wish, you could discuss your goals, plans or queries with your mortgage broker who can assess your situation better and crunch the numbers for you. This will help you get a better idea of your cash flow and the ability to service an additional loan. You can post your home loan query here to have it answered by experts or fill up this contact form to have a verified mortgage broker contact you. Don’t worry, you will not receive any unwanted calls or emails. Your information is safe with us.

 

By Vidhu Bajaj,
HashChing Content Writer

 

teaser-popup-img.png
HashChing is helping Australians by providing access to the pre-negotiated home loan deals. Obligation free consultation with one of our partner brokers might save you time, hassle and money.