Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.
I have found a lot of information in regards to paying off a mortgage vs investing. However, I cannot find much to match my circumstances and am hoping you could shed some light.
I live with my father and have a very low cost of living. I have an investment property and also invest in Vanguard index funds.
If I lived in my property I would prioritise investing in the equity funds over paying extra on the home loan. My question is would there be anything to think differently about if the property is being used to create income as an investment rather than a debt burden if I was living in it? Is there any reason to prioritise paying extra on the mortgage?
It depends on a few things.
Is your IP’s loan interest only or P&I? I have recently changed both my I/O loans into P&I because the difference in interest rate between them has reached a level so great that it’s only around $150 extra per month to switch to P&I. This comes with the added benefit of actually paying down the loan too.
This was the intention from APRA when they had a crackdown on I/O loans. I didn’t want to switch to P&I because like you, I would rather invest in the market vs paying off principal. But there comes a point in interest repayments when I had to make the switch. Touché APRA.
Take a look at the rate you’re paying and work out how much you could save in interest if you switched to P&I.
The other part to this puzzle for most people is their risk tolerance and how they react to bear markets. It’s very safe to simply smash out a mortgage ASAP. Some people can’t sleep at night with a lot of debt to their name.
Mathematically speaking you’re historically better off not paying extra off your loan but instead investing that surplus into the stock market.
Just make sure that if you do have extra to put in, dump it into an offset and not against the loan. This is for tax-deductible purposes and may help you later on if you decide to use that offset money elsewhere. A redraw and offset are not the same things!
First of all, thanks for the great content!
I wanted to know if you have any posts on super or any advice on what to do with your super account for early retirement? Do you have an SMSF or do you go through a specific super fund? Basically, I want to know what I can do to optimise my super. I live in QLD and I’m with Qsuper.
This was one of my goals for 2018, to write more about Super which I have failed miserably 😞
I tried to get a Super expert on the Podcast but just kept on getting the run around with them. I was close to getting Trish Power on from superguide.com but I couldn’t lock in a time and date. She’s a busy woman!
I just have so many other things to write about that Super got a bit neglected, unfortunately.
I’m personally with Vision Super and Mrs FB is with VicSuper. I’ve heard great things about HostPlus and recently, Rest Super just released investment options where they charge 0% in management fees. You still have to pay the underlying fees but usually, Super funds charge their own fees on top of that so it’s a pretty sweet deal if you ask me.
Super can bundle other things like life insurance so make sure you do your own research and compare apples with apples.
Hi Aussie Firebug,
Thanks for your Great work on the blog and podcast.
I wanted to ask about your move to Strategy 3, I think I understand the logic behind it and what you’re looking to achieve.
If I can play devil’s advocate, wouldn’t it make more sense to invest in higher growth indexes for now (e.g. US Markets/VTS has massively outperformed ASX/VAS/A200 over the last 10 years even allowing for dividends), as this would grow your net wealth and allow you to achieve FIRE earlier. After that, you could sell VTS/VGS, convert to dividend paying shares and LICs, and live off the passive income?
Key point being, while you’re working and not reliant on the dividend income, growth stocks/Index funds would allow you to grow the pie larger and more quickly. Once it’s at a sufficient size where the equivalent value in Aus dividend stocks/index funds would pay enough passive income to live off you would sell and convert right?
Cheers and thanks for your time.
In a perfect world, this is exactly what I’d be doing. But unfortunately, our world and financial markets are far from perfect.
What you’re suggesting here is to basically try and time and market. Which is really, really hard to do. The biggest risk is a big bear market just before retirement. If the markets tanked (ironically they are plummeting each day as I type this), it could delay our retirement date by years. I’m more comfortable with strategy 3 even if I have to work a year or two more to get to the end goal.
It’s ironic that you mentioned VTS too because it has had a very rough trout during the last few months
Could you imagine my disappointment if I was going to retire in 2019?
Having said all that, I do hedge my bets a little with VTS and VEU. But the focus for now in the Australian market.