A little bit of a controversial heading, don’t you think?
No, this isn’t a paid advertisement on behalf of Australia’s lenders, but it potentially makes good sense for people looking to grow their wealth.
It’s true: Australians have been paying down debt at breakneck speed since the 2008 global financial crisis, particularly in the last couple of years while property prices have been relatively flat in most markets.
But consider this. Should you be paying off your home loan with extra repayments whilst property prices are rising?
Take Adam and Jo for example. They have a home valued at $500,000 and a home loan at $350,000 with repayments of $1,870 a month. Adam and Jo though choose to pay $2,400 per month because they want to pay off their mortgage as fast as they can.
Another couple John and Samantha who have exactly the same home and loan value have decided not to pay extra money off their home loan, but rather to buy an investment property (using their home equity) valued at $350,000 with a loan of $375,000. Their accountant advised them to ensure their investment loan was interest only, but to keep their home loan at principal and interest.
Here’s the outcome for the 2 couples after 7 years and a rising property market:
Quite simply, John and Samantha took advantage of a rising market using their cash which they were using to pay down their home loan; placing it towards another property to earn them capital growth. With rent and negative gearing getting them a hefty tax refund, the new investment cost them nothing extra out of their own pocket.
Of course, you need to be careful where you buy and getting the right advice is integral to achieving good capital growth even during a rising market. Be diligent in your search and don’t be afraid to look interstate to get a good area if you can’t afford to buy where you want to in your own state.
Finally, upon purchasing my own first property from my neighbour, I asked the very wealthy older gentleman who I knew well, “when is the right time to buy my next investment sir”?
His answer was simple. “If you can afford it, the right time is always now.”
Perhaps it is.
Article first appeared on, and is courtesy of, Loan Market.
If you’d like us to crunch the numbers to see if this sort of strategy suits your situation, contact us below and we’ll put you onto Julian Packshaw, our in-house mortgage broker from Loan Market.