Written by Emma Allen on February 16th, 2016
“I CAN’T INVEST IN A PROPERTY UNTIL I PAY OFF MY HOME LOAN!”
When property values grew rapidly these past two years, the good citizens of Sydney potentially fell into three categories: Those who are home owners cheering the rising values of their property; people who are renters with the dream of one day purchasing a property; or those who are first home buyers chasing a moving target. Time in the property market can be your friend or foe.
In the case of a home owner the rising value of their property creates equity. This equity opens up more options to whether they want to leverage the funds for other purposes like an investment. But why would anyone want to increase their debt, aren’t we supposed to pay off our home loans?
Yes, ideally we would all own our homes debt free and live happily ever after. But what if owning our homes in a little more time would mean generating more wealth through a conservative investment?
Jack and Jill have a home valued at $700,000 and a mortgage of $300,000. With a minimum payment of $1,754 per month at 5% interest paying principal and interest, it will take 25-years to be debt free.
If Jack and Jill decide to pay an additional $200 per month increasing their monthly payments to $1,954 per month, they will save $46,352 in interest and reduce their mortgage repayments by 4yrs and 6months. In essence, Jack and Jill have saved $46,352! Great!
Jack and Jill decide to only pay an additional $100 per month in interest, and invested the other $100 per month into an investment property? They would reduce their home loan by 2years and 6months and save $26,005.
They purchased an investment property worth $450,000 and at a conservative rate of 6% growth the property is worth over $1million by the time they are debt free in 22 ½ years. In this scenario Jack and Jill have saved $26,005 in interest and gained $1million in additional equity.
Let’s be ruthless and say the investment property only grew by 3% p.a. that would mean the property is now worth over $500,000. If the property was sold and capital gains paid, Jack and Jill would have made over approx. $350,000, which is significantly more than the $46,352 they would have saved if they just paid off their home loan!
In the time it takes to pay off a mortgage, a small contribution invested into an investment property can generate a much bigger return. This means that the statement of “I can’t invest in a property until I pay off my home loan” is a myth.
Investing in property is much more achievable than people think, especially with an experienced team of professionals and access to the information that can help you make well-informed decisions.