Mortgage vs Investments

My mate Mick bought his first house in Marrickville in 1988 for $90,000.

In those days, most people didn’t dare stop in Marrickville to buy fuel, much less buy a house to live in.

But that’s all Mick could afford on a bar manager’s wage.

And then in 1990, interest rates went from 12% to 18% in six months and unemployment sky-rocketed thanks to the recession.

Understandably, Mick was a tad nervous, so he went and saw his accountant who gave him the best advice ever.

He told Mick to leave $1,000 in his savings account for emergencies and to squirrel away every last dollar he had and put it on the mortgage.

(BTW…there were no off-set accounts in those days)

This was music to Mick’s ears…especially since the bloke’s tighter than two coats of paint.

And six years later his house was paid off.

Recently, a finance journalist wrote about how she bought a house to live in two years ago with the assistance of her parents.

And now that she’s paid her parents back, she’s decided to make the minimum repayments because she wants to buy other assets to support her standard of living in retirement.

But here’s the scary bit…she openly admits her mortgage won’t’ be paid off by the time she retires if she does this.

Hello! Then why do it?

If you want more money to spend in retirement, get rid of your mortgage repayments!

Maybe she’s expecting an inheritance from mummy and daddy.

But if you’re not that lucky, here’s the best advice I can give anyone regarding debt management…

Get rid of your non-deductible debt asap!

This includes your mortgage, personal loans, credit cards, the whole sha-bang.

I.e. anything that’s not tax deductible.

And don’t even think about buying another asset until you do.

Everyone has their own way of doing things, but here are two reasons why I disagree with her idea of deprioritising her mortgage.

1. She’s turned a common dilemma (mortgage vs investment) into a strategy of ‘either or’, when she didn’t need to. She could very easily do both.
2. She’s opined that because interest rates will remain low until 2024 (maybe), now’s the time to load up on more debt and keep buying assets.

I’m not sure if that’s gutsy or dumb. Especially when asset valuations are at nosebleed levels.

Incidentally, the Bank of America recently released a report which shows, more new money has entered the stock market during 2021 than the previous 21 years combined.

Try swallowing that with your Saturday lunch.

It’s little wonder therefore, this is the most expensive market in history.

Next week I’ll show you how this journalist could have reduced her mortgage and simultaneously built an asset base with a lot less risk, while increasing her cashflow and collecting some juicy tax savings along the way.

In the meantime, just do what my mate Mick did. Jam every last dollar into your mortgage while interest rates are at ground zero. It’s a gift!

Who knows, you may end up like him. Loaded, pulling beers part-time without a worry in the world.

Have a great weekend!

Adam

Back paddock – it’s easy to spend it when you’re young, but hard to earn it when you’re older – Jim Munnoch.