When we have a bit of spare cash there is always the question of what is the best option to do with it. Some people build savings, some may favour other investments and some think it’s a good idea to pay it off the home mortgage. So Should I pay down my mortgage?
If we consider how much interest you can get on a savings account at today’s interest rates the traditional savings account has lost a lot of its attraction. Financial planners may still be positive on the economy and favour investments in shares or managed funds which can give a far better return. Typically, some blue chip shares are returning dividend yields of around 7%, fully franked which far beats the traditional savings account. Of course there is market risk that the share price could drop, or could rise. This would mean your capital invested could decrease in a falling market thereby negating the better dividend return. Conversely if prices rise your return could become very much enhanced by a capital gain on the shares. This concept flows through to managed funds which typically hold a range of shares and other similar investments. A good fund manager and financial planner can achieve some good returns.
The average person out there does not have the expertise to effectively play the market and may be more conservative in their outlook. With the share market being rather erratic in recent times an alternative may be to reduce the interest they pay on their home mortgage. In contrast to interest and dividend income which is taxable, interest saved is effectively an ‘after tax’ benefit. As a typical mortgage is around the 5% mark this can be quite attractive given the relatively low risk.
An even better alternative could be using an offset account meaning that the balance of this account is offset against your mortgage and interest only paid on the net amount. The added benefit is that these funds are available as a ‘redraw’ if you need the cash for something. This is also useful if parking fund against an investment property loan.
When considering paying down the mortgage it may also be worthwhile to have a health check on your mortgage. With rates having fallen over the last few years there is a fair chance that there is a better loan available. With the lower rate coupled with the offset account there may be a lot for you to gain. We have associations with reputable brokers that we can refer you to who can help you get the most out of the present low interest situation. Each person’s individual circumstances are different. Consider “Should I pay down my mortgage?” to your unique circumstances.