Invest or pay off your home loan?
Wed April 28th 2021
Reducing your debt is a risk-free way to use surplus funds, effectively guaranteeing you a return equal to your home loan interest rate.
With home loan interest rates so low, and investments performing well, it’s hard to know how to prioritise your money. Reducing your debt is a risk-free way to use your surplus funds, effectively guaranteeing you a return equal to your home loan interest rate. If you’re risk-averse, or you just find the idea of a mortgage-free house really appealing, funnelling your extra money into loan repayments can be extremely satisfying.
But there’s an opportunity cost of paying down your home loan. If you do have surplus cash, investing it could earn you more money than the interest you’re paying on your mortgage. Also, if you have that money in a flexible investment where it’s not locked away, it’s there if you need it – say if you lose your job or you see an opportunity like a business you want to buy.
It’s vital to have your investment time horizons right, because the sooner you need the money, the more conservative your investments should be. If you can invest for five years or more, you can choose a growth fund that might return an average of 8% per year over the long term.
And of course, keep paying off that loan slowly: You should always continue to pay your loan so it’s done within the 20 or 30 years, and talk to someone about what’s the best approach for your surplus money. If you’re risk averse, stick with extra debt repayment. But if you can choose a low-cost diversified investment fund that allows you to withdraw at any time, that may be a better tool to build your wealth.
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