- April 25, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Situation Overview
In our early 30s, my partner and I have been proactively paying down our mortgage and now have 75% equity in our home. However, upon closer examination of our financial situation, I realized that we have been neglecting investments.
We have been allocating only 4% of our takehome pay towards index funds. Today, I made the decision to increase this to 6% of our net pay, making it a total of 10% if we include contributions to kiwisaver.
## Current Financial Strategy
With the prevailing economic climate and current interest rates in mind, I am curious to know what others are doing with their investments. It is crucial for us to ensure that our money is working effectively for us in these changing times.
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It really depends on the timeframe.
* Early mortgage repayments produce guaranteed and tax-free interest savings which are equivalent to earning simple interest on the repayment amount.
* Equities produce compounding returns at variable rates, and those variable rates can be negative.
Over the short to medium term there won’t be much apparent difference. But over the longer term the equities will probably outperform the early mortgage repayments. But they aren’t guaranteed to do so. So a balanced strategy would be to use surplus income to do both.
I personally pay every dollar I earn into early repayment of my mortgages so I can leverage them to additional acquire income producing property investments. But this isn’t something that most people should do.
Was doing the same but have decided to switch it up a bit. I worked out the percentages and felt odd to have such a vast majority of money tied up in home equity.
Now that the mortgage total isn’t stressfully high id rather diversify a bit. Who knows if it’s the best option but that’s the nature of investing, no one really knows what the market will do. This way I feel a bit better about it which is a win in my book.
Hey, similar situation but 41 with 2 kids. Equity is around 92% with enough investments to pay off the loan in full. Recent 12 month returns with investments have been around 23% which is a premium on the 8% ish that we pay on the home so not keen to do that. Also, capital gains is untaxed so that 23% represents ‘real’ returns.
Our plan is to get mortgage free within 18 months then pile into investing. We can do that while saving/investing 50% of our income currently.
In short, for us it’s a balancing act rather than preferencing one vs. the other. Bob each way so to speak. That said, my long view has been that the NZ economy is built on sand and it’s important for me to own a home outright to protect against a massive, local downturn (which could play out Argentina style over the next few decades imo).
Both – continued investing at pre house purchase rates, a few years down the track with increased interest rates, I’m focusing more on the house to reduce the mortgage asap, but continuing to invest as well.
A quid each way I guess, looking for increased equity in the house, but growth in the share portfolio as well.
DINK for us Mortgage is 25% of our total income and investments to index funds at 20% excl kiwisaver.
When we have kids will probably reduce investments a little.
No real preference between the two so just diversify equally.
Boring answer – Mortgage.
You pay down your mortgage faster.
With rates at 6.8 % plus, you gave a great opportunity to clear your mortgage. Once you have cleared mortgage, you put that into indexes, etc.
Your peak income is generally in your 40s so that is when you want to accelerate investing
Over the long term the equity markets will outperform paying off the mortgage.
Not really answering your question, but as food for thought:
– Mortgage debt and asset allocation by PWL Capital: https://www.pwlcapital.com/mortgage-debt-and-asset-allocation/
I view my mortgage as a negative bond, except that it’s illiquid. They’re two sides of the same coin otherwise. I believe it’s for the same reason Simplicity holds their first home loans in the domestic fixed income portion of their portfolio. If you have bonds in your portfolio, you may consider selling them to pay off/down the mortgage. You’re not really lowering risk by holding them both as they cancel each other out.
P.S. If interested, check out this thread on bogleheads.org:
– “Mortgage is a negative bond” – please help me understand: https://www.bogleheads.org/forum/viewtopic.php?t=346160
Unless you’ve unlocked an extremely low interest rate for the rest of the mortgage. Pay down your mortgage first. Paying down debt is tax free guaranteed return on your net worth.
My partner and I just paid down around 60k in mortgage in April – it helps especially when rates eventually start to go down, then you suddenly find yourself with a lot more cash to spend/invest. And hopefully by that time financial market is less insane unlike this past week.
IMO pay down the mortgage first.
Mortgage free first. Always. It’s not good debt as you are paying the interest. You do not need to invest in anything else yet.
You are already 100% weighted in property. It would only be smart to put pretty much all other investment money into index fund. People saying to pay down debt, ‘as interest rates are so high’, fail to see that, those rates are temporary. Once you make extra payments, the moneys gone. In 3 years rates could be 3-4%. If you put all your money into mortgage, now that rates are back down, you’ve got no money in the index. Index should do 10% roughly YoY (including tax, of which there is little). Unless rates for mortgages exceed 10% (and this would need to be for a sustained period of time), maxing out on leverage 30y term, rest into index.
As time passes you will actually be more diversified now that you have the house + index fund growing. Sure loan might be bigger for longer, but index will definitely outstrip loan balance over long term.
If you need to emotionally trick yourself into thinking that paying the mortgage off first is smarter, then you are limiting your financial success. Yes sure there may be other factors to consider, but all external factors removed, index is 100% best choice historically, and mathematically
I’d be interested for someone to share an opposing view