Mortgage Interest is Dead Money
The New Year is a great time to stop and think about where you are financially – and where you want to be ten or twenty years from now. One thing that a lot of people forget to think much about is their property investment position, especially considering that property tends to be a ‘set and forget’ sort of proposition. However, spending some time looking at your property portfolio and how you can maximise your returns could be of immense benefit – not just in 2016, but for years to come.
Should you be renting your home?
One change that can have big effects on an investment portfolio is renting your primary residence rather than owning it. This goes counter to the common ‘wisdom’ out there, that ‘rent money is dead money’ – however, it’s important to realise that interest paid on a home loan is also dead money, unless you can get it working for you. That’s possible in a property-investment scenario – but not in a scenario in which you’re paying off a loan on the home you currently live in.
What makes the difference?
In most cases, regardless of current interest rates, it is cheaper to rent than to be paying off a mortgage. The money saved can be channelled into an investment property, which can then provide you with tax deductions as well as income toward paying it off when you rent it out.
How can I figure out which scenario is best for me?
It’s important to realise that financial advice is rarely ‘one size fits all’. There are a lot of variables that affect whether owning your home or renting it and buying an investment property would be a better move for you. These include, but aren’t limited to:
• How long you’ve owned your home (this affects the ratio of interest to capital that you’re currently paying off).
• The cost of mortgage repayments on your home compared to renting a similar house.
• Your existing investment portfolio.
• The applicable tax deductions available to you if you rented out your current home.
We wanted to put together a template to help you work out how much you could save in a ‘rent and invest’ scenario, but it got too complex for easy use.
Talk to an expert if you’re unsure
This area of finance can get quite complicated, and if you’re having trouble figuring out what the correct next step is for your financial future, come in and talk to us. We’re offering a limited number of free consultations with free financial plan (valued at $199) – book in early to avoid missing out!