As a firm that has mortgage brokers and financial planners, we have fielded this question from a lot of our clients in Perth: “Should I pay off my home loan or should I invest in property?” While there is no answer that is right for everybody, the short answer here is that you should invest in property. Why? Let’s take a look at two scenarios.
Paying Off the Home Loan
A home is worth $300,000 and you have a $300,000 loan. You have a principal and interest loan and pay it for fifteen years, getting it down to $150,000. In the meantime, the house has doubled in value to $600,000. You now have a total of $450,000 in equity after 15 years.
Buy Investment Property
In this scenario, you live in one $300,000 home and buy another for $300,000. But instead of a principal and interest loan, you take out an interest only loan on both properties. This can cost approximately the same amount of money coming out of your pocket per month as the first scenario. It can also cost more or cost less, depending on your negotiation, property management and cash flow skills.
After 15 years, you still owe all of the principal, or $600,000. But your properties are now worth $1,200,000, providing you with $600,000 in equity. But what if you had bought two investment properties at $300,000 each on interest only loans? You would then owe $900,000, but your properties would be worth $1,800,000 providing you with $900,000 in equity.
That gives you twice as much equity as the first scenario does.
One Size Doesn’t Fit All
We would like to stress that you should talk to a qualified financial planner about your individual situation before embarking on any course of action that could be considered risky—a risk that is acceptable for one person’s situation may be unacceptable for another.
At Purely Finance, our mortgage brokers have years of experience helping procure home loans for our Perth clients. Our financial planners can help you determine the right investment path for your individual situation.
Call: (08) 9453 8888.