So, you’re in the position where you can pay off your home loan or get started on an investment property portfolio – congratulations!
There are pros and cons to both. You should always seek professional advice before making any decisions, but in the meantime here are some things to consider.
Paying off home loan early
- Psychological benefits
The relief of knowing that you own your home outright can far outweigh any of the financial considerations. Life has many unanticipated surprises. Unexpected expenses pop up all the time and changes to employment can occur with no warning. Not having to pay a mortgage can provide the ultimate peace of mind.
- Say goodbye to costly interest repayments
Interest makes up a large portion of repayments over the lifetime of a loan. And while interest rates are at record lows in Australia, the longer you hold a home loan, the more interest you pay. Paying off your home loan early means that you will be saving thousands of dollars in interest repayments while reducing the impact of any future rate rises.
- Start ticking off other goals
A home loan is one of the biggest debts you’ll have. Being mortgage-free means you can get on top of other fiscal goals like paying off a credit card or car loan, making more contributions to superannuation for retirement or saving for a large holiday.
- Extra fees
Many lenders charge for paying off a home loan early, imposing exit, break or early termination fees. You need to factor such fees into your decision and discuss the options with your home loan lender.
- Being caught out with not enough cash flow
Paying off a home loan may mean using a large chunk of savings. But just because you don’t have a home loan doesn’t mean you won’t face other expenses with home ownership like urgent repairs, insurances and much more. It’s important to maintain a cash buffer for these instances.
Investing in a property
- Wealth and equity creation
Investing in property means you are not only benefiting from regular rental income, but you are also increasing your equity over time. Equity grows through a combination of paying the loan down and the property’s value increasing.
- More tax benefits
There are many expenses involved with owning an investment property, including insurance costs, property management fees, repairs and strata fees. But as a property investor, you can claim them as tax deductions.
Applying more tax deductions to your taxable income means you pay less tax. Deductions are applied to your total taxable income, including sources outside of rental income like a salary.
In further good news, non-cash tax deductions are also available to investors. Depreciation is the natural wear and tear of property and assets over time and investors can claim it on their rental property. This single deduction doesn’t cost a cent to claim and can reduce tax liabilities by thousands.
- Setting yourself up for your future
Rental income can provide an additional income stream, which can make up part of your ‘nest egg’ once you hit retirement age. Once you reach retirement age you can continue to use the rental property as a reliable income stream or choose to sell in the future and receive a large sum of money (taxes apply).
- Risks that can hit your back pocket
Like any investment, property investing comes with its own set of risks. These are often in the forms of tenant-related risks causing loss of rental income, or property damage. An adequate insurance policy can mitigate many of the risks associated with property investing but it’s impossible to cover absolutely everything.
- High upfront and ongoing costs
Forking out the cash to buy another property while still paying off your main residence is a huge financial decision. It requires significant financial outlay and can cause you to go into much more debt.
Therefore, it goes without saying that you must factor in these additional costs when making your decision. Tools such as PropCalc can help you estimate the likely cash flow impact owning a specific property will make.
The bottom line
Before making any decision, it’s crucial to speak with a professional who is qualified to provide financial guidance, like your accountant or a financial adviser. They will assess your current situation, explain the likely outcomes and help you put a tailored plan in place to suit your individual circumstances.
If you do go down the investing in property path, get a depreciation estimate early. Property depreciation has the potential to boost cash by thousands, especially in the earlier years of ownership when costs are higher. To learn more, contact BMT on 1300 728 726 or Request a Quote.