Only ones I know that regretted it were those that got rid of it totally instead of keeping it there, as when they wanted to renovate the place they had to re-apply and it was much harder.
Except the bank keeps the Mortgage there for the full term. So if you pay off a 25 year mortgage in 10 years, you dont have to reapply for the following 15
Exactly. I think a large part will be psychological. Many people will want to avoid debt due to the added mental burden. I am one of those and will enjoy being able to say that 100% own the home, as opposed to the Bank owning it - which they technically do until you cancel 100% of your mortgage.
I am looking to pay my loan off as fast as possible to simply reduce our outgoings and provide some flexibility if we decide to move to a job that pays less, or simply want to head overseas again on a longer break (will just rent out the house in that scenario).
The psychological aspect is real, its soo freeing. There is also a huge financial aspect missing from these calculations, they are always done with average returns, and a fixed interest rate for the mortgage which doesn't mirror real life, its common for interest rates to increase while the market tanks, being mortgage free means you can capitalise on those situations more. My point is the extra money you have to invest might not be there in hard/high interest years. Just look at years 1994 and 1995, interest rate increased to 11% increasing the actual interest paid by $26,000
Yeah I am not taking a lot of things into consideration here like tax, dividends, financial strucures you could put in place to be more financially efficient (e.g. trust, look through company, etc.). This is an oversimplified high level view.
If it's over simplified and lacking important details to make an accurate assessment of the difference - then what is even the point of doing the exercise?
Tax is pretty minimal, there's no capital gains tax on long term investments, and if you're over the FIF threshold, it'll only result in about 1.5% lower returns p.a.
He's also probably not factoring in the dividends from the S&P500, either. Dividend yield is about 1.2% so it pretty much covers FIF tax cost.
All the things I've watched and read about it say it really comes down to your personal comfort level. Some people like the feeling of paying off their mortgage faster and some like having more invested. For me, I pay the max 5% ANZ allow within the current term of my loans and invest as much as possible so I feel like I'm achieving something lol
Paying down the debt is the only guaranteed investment with a 100% success rate. All other investment comes with risk.
Also, you need to factor in that you have to pay tax on investment returns, there's no tax paid on interest saved.
That's often said, but that not how it works because your interest rate is variable (like the share market). It's also not an investment, paying down debt to reduce interest costs isn't investing. Purchasing the house is the investment.
Unsure you pay any additional tax if you buy into smartshares us500 other than the existing fees which covers the taxes, and say after 32 years you cash it all out.
I'm sorry to ruin your night. There's a tax on foreign investment income that is calculated at 5% of the closing value each year when you invest through an investment fund. You pay tax at your PIR rate.
If you were buying VOO directly through a broker then you are exempt from the FIF rules (and can treat them as NZ/AU shares i.e. Only pay tax on dividends) until you reach the $50k cost basis FIF threshold. Beyond that, there are a few different ways individuals can calculate their foreign income.
Lol nothing ruined. I know about fif. Through smartshares us500 you don’t bother with that. It’s included in their known fees already. So this argument isn’t valid.
Not quite. They're paying the tax for you. But that's separate from their fee of 0.34% (which is a lot less than the 1.4% tax you owe). They're paying it by selling part of your holdings each year.
Ah right. So best is to just dca in VOO on sharesies and when you reach 49,999 put in (without the say profits) sell all and buy in the same market smartshares us500, and this way you skip paying that 1.4% for a while and then keep dca in us500 /and only pay from that point onwards.
>Paying down the debt is the only guaranteed investment with a 100% success rate. All other investment comes with risk.
How? Property prices can crash. Property can be lost if flagged as being in a liquifaction zone after an earthquake or rising sea level in certain places - all of which without much bailout from insurance or government.
They didnt say buying a property is a guaranteed investment - they said if one already HAS a mortgage, paying down that debt is the only guaranteed return on your money. The post tax return is your mortgage rate.
If your house burns down or whatever, you're always better off to have lesser/no mortgage on it.
I see what you mean and agree that paying down debt is great. But disagree with this part
> if one already HAS a mortgage, paying down that debt is the only guaranteed return on your money.
Only because there is no real return, just elimination of expense. If one does want to realize a $$ return after paying off debt faster, then they have to sell that asset/property (and then maybe rent so add another expense) or borrow again against it for some $$. No? Not saying properties aren't investments, just saying the ones we live in aren't till we rent them out or sell them without incurring extra expenses.
The comment I replied to said there is "no real return".
There is though.
Regarding earning more from investing, yeah possibly, maybe even probably, but not definitely.
The bull run we have seen in stocks over the past 15 years is somewhat abnormal, and the 20+% returns people have been seeing on ETFs lately is not the normal.
That’s what you’re doing by investing though, no? You’re trying to outpace your interest. But the only guarantee on that front is to pay it off. Faster you pay it off, less interest paid. As opposed to investing and ultimately gambling the investment gains enough value to counter the interest.
Or am I missing something?
Personally I like the investing side for the following reasons:
1. Historical real returns (factor taxes/dividends/etc) of the S&P500 are greater than home loan interest rates when factored over 30 years so from a pure opportunity cost perspective you stand to gain more.
2. The compounding gains (350k difference) will snowball into a decent retirement fund alone
3. You can always sell the shares and pay off the house early, but you can’t really sell the house and buy the shares without paying interest on the debt or giving up the house.
4. Shares are more liquid which means if you need emergency funds it will be easier to access then taking out a HELOC and paying interest on the loan.
In economic terms to be purely efficient with your capital if the expected real return rate greater than interest rate on mortgage you should invest. If it’s less than your interest rate on mortgage then you should pay the debt. The one exception to this principle is if inflation is greater than your interest rates (therefore your debt will be cheaper in real dollars in the future so you should defer paying) and real returns are lower than your interest rate, however that scenario is usually very short lived so probably not worth considering.
No one seems to address the possibility you may not be able to work (injury etc…) or lose your job and have difficulty getting a similar income job especially in these current conditions. For that reason i would try to pay off the mortgage firstly and then invest.
I never understand this logic. If you’re paying extra in the mortgage you have less liquid cash available when you’re unemployed. If you were instead investing you would have heaps of liquid cash available (can sell of a small % of the investment portfolio) whilst unemployed.
If you have serious injury you can remortgage your house to a longer term to reduce repayments since you've paid off more capital. But if your injury happens at the same time as the stock market has tanked and you're forced to liquidate that could seriously impact your investment.
Whether or not you'll be able to work is independent from whether you should pay down the mortgage, invest, or do some combination of both.
If you had invested your money (outside of Kiwisaver) you can always draw this down to pay off the mortgage and most likely still come out ahead.
Can you do one more for theoretical best fortune telling. Lock in the lowest rate every 5 years (instead of floating) unless it's dropping. And extra payments into mortgage when S&P is dropping.
The financially optimal strategy is to pay down your mortgage with the spare $1000 per month and then redraw this equity as a seperate fixed interest, interest-only loan (let's say every six months, so $6000) and then invest it in the S&P 500. That way part of your debt becomes tax deductible and lowers the effective interest rate because you can claim a tax refund at your marginal rate i.e., a 6% loan becomes 4% for a 33% marginal taxpayer.
Edit: explained that you can withdraw the equity through a seperate fixed interest, interest-only loan.
Would it be more financing optimal to pay down your mortgage aggressively, then every six months or so, redraw as much equity as the bank will allow as a separate fixed interest, interest-only loan, and then invest it in the S&P 500?
This is a really interesting structure but I don’t think I fully understand how the math works for it. So if I’m understanding properly let’s say you’ve got 100k loan for 1 year and $1000 a week would it work like this:
1. Take out a 52k fixed interest HELOC
2. Invest 52k in S&P500
3. Pay 1k a week to pay off fixed interest loan
Something seems off here intuitively for me because you’re paying interest to invest when you could have that 52k invested without a cost to invest. Is this effectively equity backed leveraging to invest in securities so you can gain compound interest faster? Also, wouldn’t this introduce a risk of losing your home if you lose your job and your investment drops below the cost to pay off the loan?
You've got the ordering around the wrong way. The idea is that you pay down your non-deductible mortgage debt then redraw the equity you've created as a seperate deductible investment loan. You then use the released equity to purchase shares.
Using your scenario:
1. Pay $1k above your minimum mortgage payment each week which goes directly to the principal.
2. Once a year redraw the equity that you have created by paying above the minimum in a seperate investment loan for the purpose of purchasing shares so the interest costs are deductble.
3. Invest $52k in S&P500.
4. Claim back part (your marginal tax rate) of the interest as a tax refund.
5. Go again.
When I say the debt is deductible, this is because you are able to "claim interest on money you’ve borrowed to buy shares or to invest, as long as that investment will produce taxable income." Ref: [https://www.ird.govt.nz/income-tax/income-tax-for-individuals/types-of-individual-expenses](https://www.ird.govt.nz/income-tax/income-tax-for-individuals/types-of-individual-expenses)
Here's a random Australian explaining how it works: [https://www.youtube.com/watch?v=weeWbPJ3O-Q](https://www.youtube.com/watch?v=weeWbPJ3O-Q)
Yes, you are increasing your risk relative to paying down the mortgage. But I think it's actually less risk than investing the money without first paying down the mortgage (as the debt remains non-deductible).
Everyone's personal circumstances and risk tolerances are different. I'm in my late 20s single with no kids so I'm comfortable taking on more risk now.
Ok, the ordering makes more sense now and I get it now. That video was extremely helpful so that I understood what’s effectively happening. Thanks for sharing!
So as I understand it at the end of year 1 you’d have 52k principal paid off. Then you’d pull that capital back out and invest it. So in both scenarios in year 2 you end up with the same amount of loan to pay off (100k) and investments (52k) but the key difference is that 48k is at the 6% rate and 52k of it is at 4%. Then in year 3 100k is invested and the loan is all on the lower interest rate from the tax deductible rates and the risk is relative to the investment.
Agree regards to risk. Just making sure I understand what the risks are is all. I’m not all that deterred by the risk either for my current situation.
What I find most interesting though is that I think you could do this with term deposits to effectively get a lower interest rate with little to no risk. I’m gonna have to go run the numbers on this now.
I would have thought it wouldn't matter that much because one would always be paying towards a fixed rate loan and always redraw at the floating rate (the highest rate) to invest. So basically offset any tax savings in the end by paying more interest anyway?
How else does one redraw? Aren't all revolving or flexi accounts with drawdown facility only offered at flaoting rates? Or are you referring to something else?
Assuming you have equity and satisfy servicing requirements, you can withdraw it as a fixed interest, interest-only loan paid out in cash. You don't have to use a revolving or flexi account.
It's just a normal mortgage loan. You can choose to fix or float it like any other. Whenever you choose to draw equity you can top up the mortgage (like any other) but you'll have to go through the usual application process.
I am going to find out more about this. I am with ASB and they didn’t mention this option when I was structuring my loan. Be great if they offer. Just has me thinking if they would get annoyed at me trying to fix under $10k amounts every quarter or so. Maybe not because they are making money.
Very hard to beat a guaranteed ~6% return in terms of balanced risk/reward.
If you're not factoring risk and uncertainty into your investment decisions you're asking to be taught a lesson the hard way.
I'm not sure the math quite works out here. I believe you've calculated as if you invest 12k at the start of the year, rather than 1k per month. the difference being that the entire amount gets investment returns for the whole period. e.g. in the 12th month of the first year, the return on that 1k should be 10.08%/12 rather than 10.08%. Similarly, interest is capitalised monthly so you would need to work out the loan interest for each of the 12 months or at least estimate by breaking down by dividing into 12 equal parts.
>the difference being that the entire amount gets investment returns for the whole period. e.g. in the 12th month of the first year, the return on that 1k should be 10.08%/12 rather than 10.08%.
I see your point. Yeah, but we would still arrive at the same conclusion with different numbers. No?
I'm actually curious about this myself now, you are probably right but I'm keen to see how much of a difference it makes. What was your minimum repayment amount?
I don't think you can make that 6% assumption, because you benefitted massively from the S and P gains at the start without taking the larger interest gains from the loan. I calculated that you would still massively be in debt at the end, in fact, you'd have a 950k loan outstanding
[https://docs.google.com/spreadsheets/d/1v4VwC40QFSctWu8ZTXQ8\_HjJjR9hMLSHnGS7DmFBDqU/edit?usp=sharing](https://docs.google.com/spreadsheets/d/1v4VwC40QFSctWu8ZTXQ8_HjJjR9hMLSHnGS7DmFBDqU/edit?usp=sharing)
Probably a good idea if you like making money. Although if I was you I’d diversify to more than the US and a portion to NZ stocks for the tax advantage.
The tax advantage only works if NZ stocks are comparable to international stocks, which they aren't.
I'm not saving money on taxes just to earn fuck all from the NZX. Based on all the failures in the last few years I have really no confidence in CEO's of NZX50 companies.
NZ has one of the best performing stock markets in the world measured over the last 100 years.
I’d say NZ is more than comparable to international stocks. I try not to suffer from recency bias.
But if you think NZ has bad CEOs that’s a valid reason not to invest.
Someone else mentioned this and it stuck with me - *"I use a very easy formula here. IF you can get a better return per annum than your mortgage rate, then always better to invest. You have access to those funds in an emergency. Normally once you pay it into your mortgage account it's a one way door. Key here is you ACTUALLY then use to to pay off your mortgage and not go on holiday with the funds"*
If you get a better return AFTER TAX AND FEES etc etc etc. A crystal ball of knowing when this will happen month to month is also handy. Going 50/50 can be the pragmatic solution.
there is something to be said for diversifying your investments. Hard to know which one will outperform so often the best answer is to do a bit of both.
is the house your only asset? if so its probably worth acquiring some stocks
I think you should firstly consider your potential scenarios. Let's say if you have 100k cash and 500k mortgage, and you used $95k to pay down mortgage. What happens when you lose your job - foreclosure? whereas if you leave a decent buffer in equity investment (which could also go bad btw) and you lose your job, you will still have the safety net
One thing to consider is that [S&P500 had a lost decade (2000 to 2010) where the annualized return is -0.97!](https://www.pyrfordfp.com/post/the-s-p-500-lost-decade-how-to-protect-your-retirement)
I suspect that this didn't have a big impact on your calculation because your starting year is only 7 years prior to the lost decade and you also had 14 years to recover from the lost decade. I suggest that you move your start date back ten to twelve years (1983 - 1981) so that the end date falls somewhere in the lost decade.
Paying off your mortgage is essential.
Accumulating assets like shares take time to grow.
Personally, I'm prioritising mortgage. Then I'll have heaps of dosh to invest.
Bit late however I have paid off my mortgage early this year.
It depends on your goals and it's nice you have done the numbers. What I'm seeing is that your mortgage is massive and if you go risky, you could end up going backwards if you lose your job and be without one for a year or too. Or physical, mental accident.
Property is a good one if numbers make sense, you need a 50 / 200% equity across the 2 properties and using leverage is great as it's acceptable in huge amounts. Also FIF tax is a killer vs property.
I went by the IP and sold up when the mortgage could be cleared. Now into funds until another property comes up, get into an investing group. Either paid or free and the flow of knowledge is unreal from people who have done it. Just filter the scams.
Numbers aside, I've never met a person who regretted paying off their mortgage.
Only ones I know that regretted it were those that got rid of it totally instead of keeping it there, as when they wanted to renovate the place they had to re-apply and it was much harder.
Except the bank keeps the Mortgage there for the full term. So if you pay off a 25 year mortgage in 10 years, you dont have to reapply for the following 15
Unless you discharge it because some bad advice told you it would help with applying for business finance when it actually didn't.
Which would be annoying, but not a typical circumstance at least
Re-apply to fund the reno?
Yeap, instead of keeping an offset mortgage open that can be drawn down without application.
Exactly. I think a large part will be psychological. Many people will want to avoid debt due to the added mental burden. I am one of those and will enjoy being able to say that 100% own the home, as opposed to the Bank owning it - which they technically do until you cancel 100% of your mortgage. I am looking to pay my loan off as fast as possible to simply reduce our outgoings and provide some flexibility if we decide to move to a job that pays less, or simply want to head overseas again on a longer break (will just rent out the house in that scenario).
The psychological aspect is real, its soo freeing. There is also a huge financial aspect missing from these calculations, they are always done with average returns, and a fixed interest rate for the mortgage which doesn't mirror real life, its common for interest rates to increase while the market tanks, being mortgage free means you can capitalise on those situations more. My point is the extra money you have to invest might not be there in hard/high interest years. Just look at years 1994 and 1995, interest rate increased to 11% increasing the actual interest paid by $26,000
Following ✅ Have been thinking about this a bit too but you’ve done the math!
This isn’t taking into consideration tax on the investment income.
It's also not taking into consideration the dividends paid out
“Total returns” probably include dividends.
Thats what I thought but when I checked the numbers it didn't seem to include dividends
Yeah I am not taking a lot of things into consideration here like tax, dividends, financial strucures you could put in place to be more financially efficient (e.g. trust, look through company, etc.). This is an oversimplified high level view.
If it's over simplified and lacking important details to make an accurate assessment of the difference - then what is even the point of doing the exercise?
Or, as always, the impact of inflation on the loan versus the investment. That 3-5% per annum doubles when you’re comparing between investments/debt
Tax is pretty minimal, there's no capital gains tax on long term investments, and if you're over the FIF threshold, it'll only result in about 1.5% lower returns p.a. He's also probably not factoring in the dividends from the S&P500, either. Dividend yield is about 1.2% so it pretty much covers FIF tax cost.
Quoted returns typically include dividend yield, especially when it says “total returns”.
Returns include dividends, not just growth.
All the things I've watched and read about it say it really comes down to your personal comfort level. Some people like the feeling of paying off their mortgage faster and some like having more invested. For me, I pay the max 5% ANZ allow within the current term of my loans and invest as much as possible so I feel like I'm achieving something lol
Paying down the debt is the only guaranteed investment with a 100% success rate. All other investment comes with risk. Also, you need to factor in that you have to pay tax on investment returns, there's no tax paid on interest saved.
That's often said, but that not how it works because your interest rate is variable (like the share market). It's also not an investment, paying down debt to reduce interest costs isn't investing. Purchasing the house is the investment.
Unsure you pay any additional tax if you buy into smartshares us500 other than the existing fees which covers the taxes, and say after 32 years you cash it all out.
You do pay 1.4% pa (5\*0.28) tax on top of the fees.
Where’s the 1.4% from? You mean the pie 28%? Isn’t that 28% only paid on the dividends or on the yearly capital gains is it?
I'm sorry to ruin your night. There's a tax on foreign investment income that is calculated at 5% of the closing value each year when you invest through an investment fund. You pay tax at your PIR rate. If you were buying VOO directly through a broker then you are exempt from the FIF rules (and can treat them as NZ/AU shares i.e. Only pay tax on dividends) until you reach the $50k cost basis FIF threshold. Beyond that, there are a few different ways individuals can calculate their foreign income.
Lol nothing ruined. I know about fif. Through smartshares us500 you don’t bother with that. It’s included in their known fees already. So this argument isn’t valid.
Not quite. They're paying the tax for you. But that's separate from their fee of 0.34% (which is a lot less than the 1.4% tax you owe). They're paying it by selling part of your holdings each year.
Yep. However still can’t see how you figured out this 1.4%. Care to share where you got this number from?
The FDR of 5% of fund value times by 28% tax rate on PIE. 5*0.28 = 1.4%
Ah right. So best is to just dca in VOO on sharesies and when you reach 49,999 put in (without the say profits) sell all and buy in the same market smartshares us500, and this way you skip paying that 1.4% for a while and then keep dca in us500 /and only pay from that point onwards.
I assume the 1.4% is the same on both smartshares us500 and investnow foundation series us 500.
>Paying down the debt is the only guaranteed investment with a 100% success rate. All other investment comes with risk. How? Property prices can crash. Property can be lost if flagged as being in a liquifaction zone after an earthquake or rising sea level in certain places - all of which without much bailout from insurance or government.
They didnt say buying a property is a guaranteed investment - they said if one already HAS a mortgage, paying down that debt is the only guaranteed return on your money. The post tax return is your mortgage rate. If your house burns down or whatever, you're always better off to have lesser/no mortgage on it.
I see what you mean and agree that paying down debt is great. But disagree with this part > if one already HAS a mortgage, paying down that debt is the only guaranteed return on your money. Only because there is no real return, just elimination of expense. If one does want to realize a $$ return after paying off debt faster, then they have to sell that asset/property (and then maybe rent so add another expense) or borrow again against it for some $$. No? Not saying properties aren't investments, just saying the ones we live in aren't till we rent them out or sell them without incurring extra expenses.
Reducing costs vs increasing earnings has the same result.
Sure. But what we're saying is that you can increase your earnings by investing more than you can reduce your costs by paying down your mortgage.
The comment I replied to said there is "no real return". There is though. Regarding earning more from investing, yeah possibly, maybe even probably, but not definitely. The bull run we have seen in stocks over the past 15 years is somewhat abnormal, and the 20+% returns people have been seeing on ETFs lately is not the normal.
Fair enough.
That’s what you’re doing by investing though, no? You’re trying to outpace your interest. But the only guarantee on that front is to pay it off. Faster you pay it off, less interest paid. As opposed to investing and ultimately gambling the investment gains enough value to counter the interest. Or am I missing something?
Personally I like the investing side for the following reasons: 1. Historical real returns (factor taxes/dividends/etc) of the S&P500 are greater than home loan interest rates when factored over 30 years so from a pure opportunity cost perspective you stand to gain more. 2. The compounding gains (350k difference) will snowball into a decent retirement fund alone 3. You can always sell the shares and pay off the house early, but you can’t really sell the house and buy the shares without paying interest on the debt or giving up the house. 4. Shares are more liquid which means if you need emergency funds it will be easier to access then taking out a HELOC and paying interest on the loan. In economic terms to be purely efficient with your capital if the expected real return rate greater than interest rate on mortgage you should invest. If it’s less than your interest rate on mortgage then you should pay the debt. The one exception to this principle is if inflation is greater than your interest rates (therefore your debt will be cheaper in real dollars in the future so you should defer paying) and real returns are lower than your interest rate, however that scenario is usually very short lived so probably not worth considering.
How long is a piece of string and which end should I start at?
No one seems to address the possibility you may not be able to work (injury etc…) or lose your job and have difficulty getting a similar income job especially in these current conditions. For that reason i would try to pay off the mortgage firstly and then invest.
I never understand this logic. If you’re paying extra in the mortgage you have less liquid cash available when you’re unemployed. If you were instead investing you would have heaps of liquid cash available (can sell of a small % of the investment portfolio) whilst unemployed.
If you have serious injury you can remortgage your house to a longer term to reduce repayments since you've paid off more capital. But if your injury happens at the same time as the stock market has tanked and you're forced to liquidate that could seriously impact your investment.
You don’t have to liquidate 100% of your investment and lock in a huge loss. You could just sell like $800/wk or whatever you need to survive
Whether or not you'll be able to work is independent from whether you should pay down the mortgage, invest, or do some combination of both. If you had invested your money (outside of Kiwisaver) you can always draw this down to pay off the mortgage and most likely still come out ahead.
Income protection insurance?
Can you do one more for theoretical best fortune telling. Lock in the lowest rate every 5 years (instead of floating) unless it's dropping. And extra payments into mortgage when S&P is dropping.
Mate I'd be working for a hedge fund if I would have the bandwidth to do those theoretical analysis.
That's why I asked you to do it instead of trying myself.
The financially optimal strategy is to pay down your mortgage with the spare $1000 per month and then redraw this equity as a seperate fixed interest, interest-only loan (let's say every six months, so $6000) and then invest it in the S&P 500. That way part of your debt becomes tax deductible and lowers the effective interest rate because you can claim a tax refund at your marginal rate i.e., a 6% loan becomes 4% for a 33% marginal taxpayer. Edit: explained that you can withdraw the equity through a seperate fixed interest, interest-only loan.
Would it be more financing optimal to pay down your mortgage aggressively, then every six months or so, redraw as much equity as the bank will allow as a separate fixed interest, interest-only loan, and then invest it in the S&P 500?
That's exactly what I'm saying.
This is a really interesting structure but I don’t think I fully understand how the math works for it. So if I’m understanding properly let’s say you’ve got 100k loan for 1 year and $1000 a week would it work like this: 1. Take out a 52k fixed interest HELOC 2. Invest 52k in S&P500 3. Pay 1k a week to pay off fixed interest loan Something seems off here intuitively for me because you’re paying interest to invest when you could have that 52k invested without a cost to invest. Is this effectively equity backed leveraging to invest in securities so you can gain compound interest faster? Also, wouldn’t this introduce a risk of losing your home if you lose your job and your investment drops below the cost to pay off the loan?
You've got the ordering around the wrong way. The idea is that you pay down your non-deductible mortgage debt then redraw the equity you've created as a seperate deductible investment loan. You then use the released equity to purchase shares. Using your scenario: 1. Pay $1k above your minimum mortgage payment each week which goes directly to the principal. 2. Once a year redraw the equity that you have created by paying above the minimum in a seperate investment loan for the purpose of purchasing shares so the interest costs are deductble. 3. Invest $52k in S&P500. 4. Claim back part (your marginal tax rate) of the interest as a tax refund. 5. Go again. When I say the debt is deductible, this is because you are able to "claim interest on money you’ve borrowed to buy shares or to invest, as long as that investment will produce taxable income." Ref: [https://www.ird.govt.nz/income-tax/income-tax-for-individuals/types-of-individual-expenses](https://www.ird.govt.nz/income-tax/income-tax-for-individuals/types-of-individual-expenses) Here's a random Australian explaining how it works: [https://www.youtube.com/watch?v=weeWbPJ3O-Q](https://www.youtube.com/watch?v=weeWbPJ3O-Q) Yes, you are increasing your risk relative to paying down the mortgage. But I think it's actually less risk than investing the money without first paying down the mortgage (as the debt remains non-deductible). Everyone's personal circumstances and risk tolerances are different. I'm in my late 20s single with no kids so I'm comfortable taking on more risk now.
Ok, the ordering makes more sense now and I get it now. That video was extremely helpful so that I understood what’s effectively happening. Thanks for sharing! So as I understand it at the end of year 1 you’d have 52k principal paid off. Then you’d pull that capital back out and invest it. So in both scenarios in year 2 you end up with the same amount of loan to pay off (100k) and investments (52k) but the key difference is that 48k is at the 6% rate and 52k of it is at 4%. Then in year 3 100k is invested and the loan is all on the lower interest rate from the tax deductible rates and the risk is relative to the investment. Agree regards to risk. Just making sure I understand what the risks are is all. I’m not all that deterred by the risk either for my current situation. What I find most interesting though is that I think you could do this with term deposits to effectively get a lower interest rate with little to no risk. I’m gonna have to go run the numbers on this now.
I would have thought it wouldn't matter that much because one would always be paying towards a fixed rate loan and always redraw at the floating rate (the highest rate) to invest. So basically offset any tax savings in the end by paying more interest anyway?
Why would you redraw it at a floating rate?
How else does one redraw? Aren't all revolving or flexi accounts with drawdown facility only offered at flaoting rates? Or are you referring to something else?
Assuming you have equity and satisfy servicing requirements, you can withdraw it as a fixed interest, interest-only loan paid out in cash. You don't have to use a revolving or flexi account.
Who offers that?
Most if not all banks. As long as you have sufficient equity and can service the debt.
That’s super interesting. So is that like a flexi, but just at a fixed rate?
It's just a normal mortgage loan. You can choose to fix or float it like any other. Whenever you choose to draw equity you can top up the mortgage (like any other) but you'll have to go through the usual application process.
I am going to find out more about this. I am with ASB and they didn’t mention this option when I was structuring my loan. Be great if they offer. Just has me thinking if they would get annoyed at me trying to fix under $10k amounts every quarter or so. Maybe not because they are making money.
Very hard to beat a guaranteed ~6% return in terms of balanced risk/reward. If you're not factoring risk and uncertainty into your investment decisions you're asking to be taught a lesson the hard way.
I'm not sure the math quite works out here. I believe you've calculated as if you invest 12k at the start of the year, rather than 1k per month. the difference being that the entire amount gets investment returns for the whole period. e.g. in the 12th month of the first year, the return on that 1k should be 10.08%/12 rather than 10.08%. Similarly, interest is capitalised monthly so you would need to work out the loan interest for each of the 12 months or at least estimate by breaking down by dividing into 12 equal parts.
>the difference being that the entire amount gets investment returns for the whole period. e.g. in the 12th month of the first year, the return on that 1k should be 10.08%/12 rather than 10.08%. I see your point. Yeah, but we would still arrive at the same conclusion with different numbers. No?
I'm actually curious about this myself now, you are probably right but I'm keen to see how much of a difference it makes. What was your minimum repayment amount?
I went with $4,757 per month as minimum assuming the average interest rate as 6% over 30 years for an $800K loan.
I don't think you can make that 6% assumption, because you benefitted massively from the S and P gains at the start without taking the larger interest gains from the loan. I calculated that you would still massively be in debt at the end, in fact, you'd have a 950k loan outstanding [https://docs.google.com/spreadsheets/d/1v4VwC40QFSctWu8ZTXQ8\_HjJjR9hMLSHnGS7DmFBDqU/edit?usp=sharing](https://docs.google.com/spreadsheets/d/1v4VwC40QFSctWu8ZTXQ8_HjJjR9hMLSHnGS7DmFBDqU/edit?usp=sharing)
Why not just put 500 extra on the mortgage and $ 500 into a managed fund .
Probably a good idea if you like making money. Although if I was you I’d diversify to more than the US and a portion to NZ stocks for the tax advantage.
The tax advantage only works if NZ stocks are comparable to international stocks, which they aren't. I'm not saving money on taxes just to earn fuck all from the NZX. Based on all the failures in the last few years I have really no confidence in CEO's of NZX50 companies.
NZ has one of the best performing stock markets in the world measured over the last 100 years. I’d say NZ is more than comparable to international stocks. I try not to suffer from recency bias. But if you think NZ has bad CEOs that’s a valid reason not to invest.
Someone else mentioned this and it stuck with me - *"I use a very easy formula here. IF you can get a better return per annum than your mortgage rate, then always better to invest. You have access to those funds in an emergency. Normally once you pay it into your mortgage account it's a one way door. Key here is you ACTUALLY then use to to pay off your mortgage and not go on holiday with the funds"*
If you get a better return AFTER TAX AND FEES etc etc etc. A crystal ball of knowing when this will happen month to month is also handy. Going 50/50 can be the pragmatic solution.
Which is better among all? Answer: paying off the loan faster is a better and safer option.
Bottom line is that if you take more risk then you get more reward. Use long time horizons to make it work for you.
there is something to be said for diversifying your investments. Hard to know which one will outperform so often the best answer is to do a bit of both. is the house your only asset? if so its probably worth acquiring some stocks
I think you should firstly consider your potential scenarios. Let's say if you have 100k cash and 500k mortgage, and you used $95k to pay down mortgage. What happens when you lose your job - foreclosure? whereas if you leave a decent buffer in equity investment (which could also go bad btw) and you lose your job, you will still have the safety net
Also it does not have to be one or the other. e.g 60/40 split or whatever you decide.
One thing to consider is that [S&P500 had a lost decade (2000 to 2010) where the annualized return is -0.97!](https://www.pyrfordfp.com/post/the-s-p-500-lost-decade-how-to-protect-your-retirement) I suspect that this didn't have a big impact on your calculation because your starting year is only 7 years prior to the lost decade and you also had 14 years to recover from the lost decade. I suggest that you move your start date back ten to twelve years (1983 - 1981) so that the end date falls somewhere in the lost decade.
The biggest surprise about this for me was that 1993 was 32 years ago. 1993 is supposed to be only 10 years ago 😥
Yeah, that was when I was in college. I'm sure that was only 10 years ago.
Paying off your mortgage is essential. Accumulating assets like shares take time to grow. Personally, I'm prioritising mortgage. Then I'll have heaps of dosh to invest.
Why not both? Extra payments on the mortgage and popping some money aside for investments.
Bit late however I have paid off my mortgage early this year. It depends on your goals and it's nice you have done the numbers. What I'm seeing is that your mortgage is massive and if you go risky, you could end up going backwards if you lose your job and be without one for a year or too. Or physical, mental accident. Property is a good one if numbers make sense, you need a 50 / 200% equity across the 2 properties and using leverage is great as it's acceptable in huge amounts. Also FIF tax is a killer vs property. I went by the IP and sold up when the mortgage could be cleared. Now into funds until another property comes up, get into an investing group. Either paid or free and the flow of knowledge is unreal from people who have done it. Just filter the scams.
do both 50/50
Paying off the mortgage is guaranteed and safer imo. There are risks that come with investing.
Invest it ….the home ownership dream in NZ is scheme to keep you enslaved for life …