Investing in property is becoming progressively popular with investment loans increasing each year by 20%. This is largely fuelled by the record low interest rates, which are expected to remain low as the government tries to give the economy a boost. Chances are, if you’re reading this, you are curious about investing, but already have a mortgage. Now, should you pay off your mortgage first and be debt-free or invest your money and hopefully watch it grow? There’s no simple answer to this as everyone’s needs and circumstances are different. There are a few things you should factor in before making any big decisions and these are:
1. How much equity do you have in your current property?
The equity in your current home is the difference between the value of your property and the remaining balance of your mortgage. For example, if your property is valued at $500,000 and you have a remaining balance of $200,000, then your equity is $300,000. You can generally use up to 80 per cent of that equity to assist you in purchasing an investment property.
If you’re torn between paying off your mortgage first or investing in property, the latter will only make sense if you’ve already built up a considerable equity, or have a smaller debt to deal with. It is advisable to speak with your mortgage broker regarding your options as they will help you work out how much equity you have to play with and what steps you can take from there.
2. How much debt do you have?
Like many Australians, you may owe a number of debts outside of your mortgage including credit cards and personal loans. It’s important to consolidate your debts so that you have the cheapest repayment possible to pay off this debt. This will give you the cheapest repayment possible for these debts outside your home loan and give you a better picture of how much free cash you have left to invest.
Your mortgage broker can assist you in consolidating your debts into one place to make life a little bit more manageable. It is advisable that you pay off the debts with the highest amount of interest first, to avoid overpaying in the long term. Debts such as credit cards tend to hold the highest amount of interest, so if you can pay them off as quickly as possible, this will lead you to owning an investment property or paying off your mortgage sooner than later.
3. Your finances in general.
It is also important to do a health check of your overall finances. Review your budget and see where your money’s coming from and where it’s going. Try to see if there are regular expenses that you make that you can do away with, such as pay TV or a home phone that you rarely use. You may be surprised at how much you could save per month, which could assist in your investment property repayments.
4. The interest rates.
Naturally, you also have to consider the interest rates because this can add a considerable amount to your loan repayments if you purchase an investment property. While the record low interest rates make it attractive and easy to start investing, try to consider whether or not you can still afford to repay your mortgage on your investment if rates begin to rise.
It is important to remember that deciding to purchase an investment property is a big decision and it is important to consider the financial options available. Working with a professional, like a mortgage broker can assist you in deciding whether you would be better off paying off your mortgage or investing in property. Each individual’s financial situation differs from the next person, so general advice most likely won’t suit your specific needs and financial goals.
Your mortgage broker will take into consideration all of your financial incomes and outgoings and assist you in deciding on the right financial decision for you with the right lenders and product that truly suits your finances.
Written by Duncan Pearce.