I am often confronted by a common situation when discussing a client’s financial position. This is typically a young couple or family with decent earnings, either as a single or dual income, and their primary financial asset is the family home. With such a strong run in house prices in the past decade or more, this often means a high level of mortgage debt attached to the property. This might be serviced by the minimum repayments with the odd additional payment, maybe from a bonus or a tax return, with the rest of their after tax income spent on day to day living.
Such situations can make people feel ‘stuck’, especially given periods of stagnant house prices and higher interest rates. Often people seek a ‘silver bullet’ to help them accelerate their wealth. Of course, such a silver bullet does not exist and the old fashioned strategy of paying off non-deductible mortgage debt should still be a primary focus.
However, there is a strategy available which is based on the concept that most people will meet their financial commitments, such as rates, utility bills, school fees etc. and spend the rest. In order to escape this so called mortgage trap, an investment strategy needs to be treated in the same fashion. By committing an amount each month, via a direct debit, and treating it the same way as any other compulsory expense, most people find that they are able to fund a long term investment strategy with little impact on your lifestyle.
For example, by targeting $400 per month, you could either use this to fund a tax deductible investment loan for around $100,000 which can be invested into a diversified portfolio. If this is able to grow at 8% p.a. for 10 years, you can potentially make $115,000 net of the debt repayment, not a bad result if you consider that the $400 would most likely be spent if the strategy was not in place! In addition, the $400 per month interest cost can generate a tidy tax deduction to improve that end of year tax return which can then be used to make a lump sum payment against that mortgage.
Whilst borrowing to invest is not suitable for everyone, there are variations to this strategy, which involve a simple direct debit into a savings account, or by starting with a small purchase of a parcel of shares and adding to this regularly with both savings and borrowings.
Should you wish to discuss this strategy in more detail, please contact us.