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Help - Spare Money onto Mortgage or into Shares?

Discussion in 'General Investing Discussion' started by Amber, 29th Oct, 2009.

  1. Amber

    Amber Member

    Joined:
    6th Oct, 2009
    Posts:
    9
    Location:
    Wollongong, NSW
    Hi All,
    Its my first time posting so sorry if this question has been answered before.

    Ok, in the last 3 years i've managed to go from being $20K in (bad) debt, to buying my first home in May with no debt other than the mortgage (although we didn't have a deposit).

    My question now is, what should i do with my 'spare' money?? :confused:

    My partner and i are already paying over $1000 extra per month to get the home loan down ASAP, but i have around $300/month 'spare' that i don't want to waste.

    So, my question is: Is it better to put that $300 onto the HL or into my managed fund (currently only have $1000 in shares)? i really am confused as to the best way to go in this situation.

    Any advice would be welcomed as i'm just starting out learning about investing.

    Thanks
    Amber
     
  2. hashkent

    hashkent Member

    Joined:
    8th Aug, 2009
    Posts:
    8
    Location:
    QLD
    Unless your a really savvy investor I would stay away from direct shares and put the surplus funds into your home loan. Rates are so low at the moment you'd be crazy not to.

    When your home loan is paid off early, pay what was the monthly house payment into a good growth managed share fund, which a professional adviser can assist you with.
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    That's fantastic - well done on a great achievement.

    What a wonderful problem to have :D

    Okay - first question ... is there any possibility at all that you might one day decide to move out of this house but keep it as an investment property (ie rent it out) ?

    If so, you really want to look at using an offset account with your home loan (if your bank will let you) rather than making payments directly into the home loan. The reason for this is that the interest on the outstanding balance will become deductible when you start renting it out, and you want to maximise the deductible portion - anything you redraw for personal use (eg funding the deposit on a new home) will NOT be deductible and will potentially "taint" the deductibility of the remainder of the loan.

    Even if you don't think this is likely, consider using an offset account anyway - it gives you far more flexibility with redraws while achieving the same end result as paying down the principal.

    Only thing to be careful about with an offset account is if you are likely to be tempted by large sums of money sitting in the bank account which is easily accessible ... as opposed to paying money directly off your loan. If you are likely to just go and spend your money, then perhaps an offset account is going to be counter-productive.

    Anyway, given that the interest you are paying on your PPOR is not tax deductible, then putting your spare cash towards that gives you a pretty good return straight away. You would only be better off investing your money elsewhere if you were sure that you could beat the after-tax returns you get from paying down your PPOR (or accumulating money in your offset account).

    While interest rates are low, you might be able to get better returns elsewhere, but as interest rates increase, your "returns" from minimising the interest you pay on your loan will increase as well. It really is a low risk way of getting a guaranteed return on your money.

    So I would keep paying down your loan (or accumulating money in an offset account if you can), and spend some time educating yourself about investing - both in real estate and shares/funds ... you can then make a more informed decision later about whether you want to use some of the money/equity you've accumulated to invest in something else.
     
  4. Amber

    Amber Member

    Joined:
    6th Oct, 2009
    Posts:
    9
    Location:
    Wollongong, NSW
    Wow! Thanks Sim, that was extremely helpful.

    We do want to buy investment properties in the future, but whether we'll leave this place or not, i'm not sure.

    I've looked into our loan, and unfortunately we can't get an offset account with our loan type (3yr Econimiser Loan with CBA).

    I'm thinking the best thing to do at the moment is to pay down this loan until we have approx. 100K in equity, then set up an line of credit and use that to fund a deposit on our first investment.

    Currently we bring home $67K (NET combined income), and have expenses of $19k (all bills, groceries, car expenses, insurance etc) and make loan repayments of $31.5K this leaves us with 16.5K spending money.

    My thoughts are if we increase our PPOR repayments to 40K, reduce our spending money to 8K (works out to be $77 p/w each) we should have approx 100K equity within 3yrs.

    So i'm wondering if anyone has any suggestions, comments, ideas whether this is reasonable, achieveable and if it is a good strategy :confused:

    Thanks for any and all ideas.
    Amber

    EDIT: I didn't factor in losing half that money to interest... i guess i'll only have about $55K in equity in 3yrs...Doh!
     
    Last edited by a moderator: 5th Nov, 2009