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Pay off home loan or invest?

Discussion in 'Real Estate' started by CCinvest, 14th Sep, 2008.

  1. CCinvest

    CCinvest Member

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    Hi there,

    The question i keep thinking about at the moment, given the sideways (at best) movement of the stock market and property properties, is it best to pay off more of my PPOR loan?

    I have a loan of about $250k, paying both interest and plenty of principle per week. I have an offset account accumulating pretty nicely next to it.

    Is the money I am saving in interest (currently 8.75%) with the offset, outperforming any net gains I would be making in todays markets?

    Is it correct to calculate if I were to invest the money, I would need a gross return over 15%pa (nett would be less tax, fees etc)?

    Am I only looking at the short term gains, and avoiding some bargains to be made, with greater returns for the future when both markets pick up? Or should I just sit tight, keep growing the offset, then get in later?

    Cheers

    CC
     
  2. ashwright

    ashwright Well-Known Member

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    Hi CC,

    What tax rate are you on? If you were on the 31.5% tax bracket you would need to make 8.75 / (1- 0.315) = 12.77% before tax on investments to get a better rate of return.

    So saving money in your offset account looks like a fairly attractive investment, in today market. Even more so if you consider the risks involved.
     
  3. CCinvest

    CCinvest Member

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    Thanks Ashwright

    Is it correct to think I am earning 8.75% interest on my savings, tax free and risk free?

    yet I am not benefiting from any (likely) growth in capital, right?

    cheers

    CC
     
  4. AsxBroker

    AsxBroker Well-Known Member

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    Hi CC,

    Like AshWright said your 12.77% pa is before tax and risk-free.
    Can you get a 12.77% pa anywhere else which is risk-free?
    The only growth you are benefiting from would be the growth in your PPOR.

    Even a term deposit has risks and they are paying about 7% to 8% pa.

    Cheers,

    Dan
     
  5. ashwright

    ashwright Well-Known Member

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    Hi CC,

    I would not say you are earning 8.75% (cause then you would have to pay tax), rather you are saving the money by not having to pay it.

    Also I would not say it is risk-free, bank deposits are not guaranteed in this country, and the tax laws could change. But it would have about the same risk as a term-deposit, which is a very low risk.

    I think you have the concept though.
     
    Last edited by a moderator: 14th Sep, 2008
  6. CCinvest

    CCinvest Member

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    perhaps i should say

    "Is it correct to think I am earning the equivalent of 8.75% interest on my savings, tax free and risk free?

    thanks

    CC
     
  7. AsxBroker

    AsxBroker Well-Known Member

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    Hi CC,

    What we are saying is that you'd need to be earning roughly 12.77% pa on an investment (before tax, which is 8.75% after tax) to have the same return, with less volatility (ups and downs) than investing in shares or property.

    Cheers,

    Dan
     
  8. ashwright

    ashwright Well-Known Member

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    You are right, I was just picking apart the wording.