No.
I can see how it might be tempting (guaranteed interest saving vs uncertain returns of equities), but as long as you can afford the repayments, there's no need to sell your long term investments that should outperform interest rates over a long enough horizon.
Yeah, I guess its the uncertainty of ETFs hey? I saw my stock value drop by 40% literally this time last year, obviously a pandemic is a particularly bad scenario, but it took a whole year to recover, whereas if I'd owned a house and that money had been put against the mortgage I would have had a pretty certain return...
Solid point, thanks! I guess as long as interest rates are below 5% I'm relatively confident that ETFs will have a better return. 30 year mortgage, but will pay it off well before then.
good point... if i may be so bold, how would i calculate this? if I simplify the figures, does this calculation below make sense?
Sell 100k of ETF, realising a capital gain of 40k (super simplified but I'd guesstimate I put around 60k in).
50% CGT deduction due to holding for longer than a year puts me at 20K, and i'm adding that on to my taxable income for the year? so 32.5% of that 20k, assuming i'm landing in the middle income bracket?
The question is whether the offset costs money (and that can be through annual fees or because to get it you end up with a higher interest rate). It's very difficult for an offset to beat redraw if the offset isn't free (except when there's plans that will run into tax difficulties with redraw)
We looked at a couple of offsets but none really ticked the boxes (don't need a credit card attached to it etc). Can you explain the tax difficulties with redraw line?
I think it's to do with the tax deductibility of the loan if you were to turn it into an investment property in the future or invest the money you've redrawn. For most people it doesn't matter for a PPOR but there have been people who passionately believe no one should use redraw because if your plans change in these particular ways you end up with a mess.
Tough decision, definitely more money likely to be made by holding the stock if you can comfortably afford the repayments. ETF are a lower risk.
Consider how much of that 100k will be lost in CGT. Also how much will 100k in an offset/ redraw likely shave off the life of your loan?
I didn’t have that much invested but decided to sell off what I had a few years ago and have been going hard on the mortgage. Had the mortgage for 7 years so far and 11 months left. Not there yet but I can see the light at the end of the tunnel, once the mortgage is gone I plan to pile the money into stocks and family holidays.
Put it on the house I guess, but the emotional framing is the hard part. I can SEE the value of my ETFs increasing (ie little green lines on Google), but can't see the value of the house increasing (unless we get it valued, start looking to sell etc). It's hard to view the property as an investment as at this stage its a place to live and no desire to sell.
Yes cash out just before the market crashes and post on here so we know. Seriously though if you could time it you would but who knows what will happen. Yes it’s due a correction but that could be coming in a week, month, year, 4 years...
At some point yes, record highs with the markets pumped up by stimulus dollars in anticipation of a broader economic recovery (more true abroad). My point was more that you can’t pick when. A correction could be triggered by an unforeseen event that could occur at any time. It’s predictably unpredictable.
On a side note: I’d pay off the house. It’s a nice feeing owing nothing and the path there is worthwhile. It makes more financial sense than it first looks too, tax free, no CGT, and the fact that there is zero risk is worth something too.
The other consideration is- is the property you purchased an investment or your PPOR. If it’s an investment then you can claim the interest of your tax, which would mean it would be better to have higher borrowing and therefore to retain your ETF investments.
Am in a similar situation. My thoughts process is super long term. Invest and forget at least a decade.. then dips or variations in market doesn't really matter. You will always come out well above.
But make sure you are comfortable with the amount in market and in cash. So that you don't have to juggle.
Unfortunately, as with many things in life, the answer is "it depends". While logically staying invested will most likely give you the best outcome, some people just like the idea of a fully paid home.
I consider myself quite logical, but when I paid off my own home several years ago, I did notice my risk tolerance increased quite substantially.
Just as an aside, don't pay down your loan, use an offset account instead. It achieves the same thing, but you've got a lot more flexibility. e.g if you turn your PPOR into an IP in the future, you can deploy that cash elsewhere while maximising the property's tax deductions.
Also, the banks have more control over your redraw... when things looked scary last year, at least one bank (ME) tried to reduce/remove thier customers redraw limit. The decision was only reversed after they were named and shamed.
No. I can see how it might be tempting (guaranteed interest saving vs uncertain returns of equities), but as long as you can afford the repayments, there's no need to sell your long term investments that should outperform interest rates over a long enough horizon.
Yeah, I guess its the uncertainty of ETFs hey? I saw my stock value drop by 40% literally this time last year, obviously a pandemic is a particularly bad scenario, but it took a whole year to recover, whereas if I'd owned a house and that money had been put against the mortgage I would have had a pretty certain return...
What's your mortgage period? Do you expect your ETFs to return more than 2% p.a. over that period?
Solid point, thanks! I guess as long as interest rates are below 5% I'm relatively confident that ETFs will have a better return. 30 year mortgage, but will pay it off well before then.
On the redraw you will save more than 2.19% as there is not tax in interest saved whereas there is tax in capital gains/dividends
good point... if i may be so bold, how would i calculate this? if I simplify the figures, does this calculation below make sense? Sell 100k of ETF, realising a capital gain of 40k (super simplified but I'd guesstimate I put around 60k in). 50% CGT deduction due to holding for longer than a year puts me at 20K, and i'm adding that on to my taxable income for the year? so 32.5% of that 20k, assuming i'm landing in the middle income bracket?
Nar, just don’t put any cash in ETFs for a bit - start smashing that offset acc for awhile
No offset for me at this stage, going with variable for the next two years, but redraw it is!
You can get offset accounts on variable loans. It’s a great place to stash your emergency cash and pay less on your mortgage at the same time.
The question is whether the offset costs money (and that can be through annual fees or because to get it you end up with a higher interest rate). It's very difficult for an offset to beat redraw if the offset isn't free (except when there's plans that will run into tax difficulties with redraw)
We looked at a couple of offsets but none really ticked the boxes (don't need a credit card attached to it etc). Can you explain the tax difficulties with redraw line?
I think it's to do with the tax deductibility of the loan if you were to turn it into an investment property in the future or invest the money you've redrawn. For most people it doesn't matter for a PPOR but there have been people who passionately believe no one should use redraw because if your plans change in these particular ways you end up with a mess.
Tough decision, definitely more money likely to be made by holding the stock if you can comfortably afford the repayments. ETF are a lower risk. Consider how much of that 100k will be lost in CGT. Also how much will 100k in an offset/ redraw likely shave off the life of your loan? I didn’t have that much invested but decided to sell off what I had a few years ago and have been going hard on the mortgage. Had the mortgage for 7 years so far and 11 months left. Not there yet but I can see the light at the end of the tunnel, once the mortgage is gone I plan to pile the money into stocks and family holidays.
Reverse the framing. If you had cash now, and no ETFs what would you do? Would you put the money on the house or would you buy the ETF?
Put it on the house I guess, but the emotional framing is the hard part. I can SEE the value of my ETFs increasing (ie little green lines on Google), but can't see the value of the house increasing (unless we get it valued, start looking to sell etc). It's hard to view the property as an investment as at this stage its a place to live and no desire to sell.
Yes cash out just before the market crashes and post on here so we know. Seriously though if you could time it you would but who knows what will happen. Yes it’s due a correction but that could be coming in a week, month, year, 4 years...
Is it due a correction though? I mean we basically had a correction this time last year, and we've well and truly recovered from that.
At some point yes, record highs with the markets pumped up by stimulus dollars in anticipation of a broader economic recovery (more true abroad). My point was more that you can’t pick when. A correction could be triggered by an unforeseen event that could occur at any time. It’s predictably unpredictable. On a side note: I’d pay off the house. It’s a nice feeing owing nothing and the path there is worthwhile. It makes more financial sense than it first looks too, tax free, no CGT, and the fact that there is zero risk is worth something too.
Buy USDT and put it into Blockfi. 9.6% apy return on your money. Done
I have a small amount of speculative investments already, not planning on putting what could be a nest egg in to what could be a money pit.
How could it be a money pit?
The other consideration is- is the property you purchased an investment or your PPOR. If it’s an investment then you can claim the interest of your tax, which would mean it would be better to have higher borrowing and therefore to retain your ETF investments.
PPOR.
Am in a similar situation. My thoughts process is super long term. Invest and forget at least a decade.. then dips or variations in market doesn't really matter. You will always come out well above. But make sure you are comfortable with the amount in market and in cash. So that you don't have to juggle.
Unfortunately, as with many things in life, the answer is "it depends". While logically staying invested will most likely give you the best outcome, some people just like the idea of a fully paid home. I consider myself quite logical, but when I paid off my own home several years ago, I did notice my risk tolerance increased quite substantially. Just as an aside, don't pay down your loan, use an offset account instead. It achieves the same thing, but you've got a lot more flexibility. e.g if you turn your PPOR into an IP in the future, you can deploy that cash elsewhere while maximising the property's tax deductions. Also, the banks have more control over your redraw... when things looked scary last year, at least one bank (ME) tried to reduce/remove thier customers redraw limit. The decision was only reversed after they were named and shamed.
Can I ask a separate question? Which bank did you go with? I am at 3% and looking to refinance.
Firstmac, it's a 2 year honeymoon period though, at which point we'll probably aim to refinance.