After nearly two years on a mortgage, I have developed a laser-like focus on my cost of living and am very confident that I will be able to service my debt with ease.
I also know that, whether mortgaged or not, I can enjoy the full tax-free appreciation of my property. That’s locked up.
I also live in a property where I like to retire, so I don’t have to build up any equity here so that I can upgrade to another.
Even though I would like to own my own home until retirement, I have realized that I will also want to own many other assets to support my standard of living when I quit work.
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So I’m no longer rushing to be “debt-free”, but regularly investing my monthly savings by maximizing my tax-deductible super contributions and also investing directly in stocks. (I’m also considering taking out more credit to invest in real estate, but that’s a story for next week. Stay tuned.)
Of course, bearing more debt also means taking more risks. Losing your job or being unable to pay can get you into all sorts of trouble.
However, a higher risk is also associated with a higher return, in the long term and with a sufficiently diversified strategy.
It is true that repaying my mortgage faster would mean that I would pay less interest to the bank than usual for the (shorter) term of my loan. However, these savings must be weighed against the potential gains from investing the excess Savings can be made.
The extremely low interest rates have radically changed this equation in recent years.
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It’s easy to forget that just a decade and a half ago, before the global financial crisis (GFC), mortgage holders were paying interest rates of 8 or 9 percent.
Mortgage interest payments as a percentage of disposable income peaked at 10 percent shortly before the GFC, according to the Grattan Institute. They have since fallen to around 4 percent as interest rates fell to record lows.
The truth is, once you step in the door with a large enough down payment, the cost of servicing a mortgage has dropped dramatically – back to where it was in the 1980s and 1990s (real estate was cheaper then, but interest rates were high higher). .
Today’s extremely low interest rates (mine is fixed at 1.84 percent for two years) have two relevant consequences.
First, as discussed, they make it much cheaper to service a mortgage.
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The second impact was massive asset price inflation – both real estate and stocks.
Why? Because people rush out and borrow a lot of cheap money to buy assets, which drives up their prices.
How long can it go on? Well, that depends on how long interest rates stay that low.
The Reserve Bank of Australia has announced that it will not raise official interest rates until 2024.
Global markets had flirted with the idea of a post-pandemic boom in global inflation earlier this year. However, COVID-19 continues to cast its long shadow.
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Even if we get out of the coronavirus cloud, we may just return to a world of “secular stagnation” and tepid wage growth that preceded it, fueled by deeper forces like the aging population.
So yeah, I guess I’m assuming this story has to go on, which is that lower interest rates are driving up credit levels and prices. If that outlook changes, I’ll check it out. You need to form your own opinion and borrow and invest accordingly.
I hear a lot: “I just pay off the mortgage and then I get serious about retirement planning”.
However, by delaying asset purchases by 10 to 20 years, people are missing out on potential capital gains during that time – not to mention the magic of compounding returns.
Ultimately, as always, it comes back to your goals and your willingness to take risks.
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But for those with sizeable mortgage buffers and long time to go to retirement, it might be worthwhile to re-examine your wealth-building strategy.
- The advice in this article is general in nature and is not intended to influence readers’ decisions about investment or financial products. You should always seek your own professional advice, taking into account your personal circumstances, before making any financial decisions.
You can follow more of Jess’s financial adventures on Instagram @moneywithjess and subscribe to their weekly email newsletter via The age here or the sun herald here.
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