Why Renting Out Your Mortgage Might Be Smarter Than Paying It Off
- Posted By Katrina | bk home broker
When it comes to financial security, traditional advice often centres around paying off your home mortgage as quickly as possible.
The peace of mind that comes with owning your home outright is undeniably appealing.
However, this strategy might not always be the most effective way to grow your wealth.
Instead, using the funds to invest in property can potentially offer greater financial benefits.
Here’s why.
1. Leveraging low interest rates
Even though interest rates in Australia have increased over the last few years, they still remain relatively low compared to historical averages.
Your home mortgage likely has a relatively low-interest rate, especially if you secured it a few years ago.
By choosing to keep your mortgage and instead using your available funds to invest in property, you can leverage this relatively cheap debt to your advantage.
The potential return from a well-chosen property investment, especially if you combine both the capital growth and rental income, would be significantly more than the 5% or 6% you are saving paying down your home mortgage.
2. Opportunity cost of capital
One of the key concepts in investment is the opportunity cost of capital.
When you pay off your mortgage, you’re effectively locking in a guaranteed return equal to your mortgage interest rate – in other words, the 6% or so that you’re not paying on your mortgage.
While this might seem like a safe bet, consider what you might earn if you invested those funds elsewhere.
As I have explained, well-located property investments have historically delivered strong returns over the long term, outpacing the cost of your home mortgage interest.
3. Building wealth through property investment
Investing in additional property can be a powerful way to build wealth.
If you think about it, rather than owning one property, your home, increasing value over time, you will now have two properties taking advantage of leverage and capital growth, and of course, you’ll have your tenants helping subsidise your investment mortgage payments.
One of the big benefits of using your funds to invest in property is that it allows you to take advantage of leverage.
By borrowing to invest, you can amplify your returns – basically, you are controlling a larger asset with a smaller deposit, maximising the return on your funds.
For instance, with a 20% deposit, you control 100% of the property and benefit from 100% of the capital gains, effectively multiplying your investment power.
Remember the bank does not get any share of this tax-free growth.
4. Tax advantages
Investment properties offer tax benefits not available when paying off your home mortgage.
Of course, you don’t invest for tax benefits, but they are the icing on the cake.
However, you can write off many of the costs of owning your investment property including insurance, rates and taxes, maintenance etc.
Further…depreciation deductions on property investments can significantly reduce your taxable income, enhancing your cash flow and overall return on investment.
These tax advantages can make property investment more financially attractive than paying down your mortgage.
5. Maintaining liquidity and flexibility
A paid-off house is a great asset, but it's not very liquid. Once those funds are used to pay down debt, they’re not easily accessible for other opportunities or emergencies.
Keeping your mortgage and investing your available funds allows you to maintain greater liquidity and flexibility.
While this might not be available if you invest in another property, it could be a reason to invest some of your money in shares or ETFs.
6. Diversification of assets
Diversifying your investments is a key strategy to manage risk and enhance returns.
By investing in property rather than solely focusing on paying off your mortgage, you can diversify your asset base.
And as I mentioned, you may choose to invest some of the funds in other asset classes like shares or ETFs.
This diversification can contribute to a more resilient and robust financial portfolio.
Psychological considerations
While the financial arguments for investing in property rather than paying off your mortgage are compelling, it’s important to consider the psychological aspect.
The security and peace of mind that comes with owning your home outright shouldn’t be dismissed lightly.
However, in my mind, with careful planning and risk management, the financial benefits of investing in property can outweigh these psychological considerations.
Conclusion
Deciding whether to prioritise paying off your mortgage or property investment is a personal choice.
It depends on your risk tolerance, financial goals, and overall investment strategy.
If security and peace of mind are paramount, paying off your mortgage might be ideal.
However, if you're looking to grow your wealth and achieve financial independence, investing in property could be a more strategic approach.
By leveraging your funds, taking advantage of tax benefits, and strategically using your funds to invest in property, you can make your money work harder for you, building a more prosperous future.
Article by Brett Warren - Metropole Properties