Pay down debt or invest funds elsewhere, there is a lot to think about!
Decisions around how much borrowing is appropriate and how quickly it should be repaid are often the most critical considerations people can make. In our current fiscal environment, New Zealand banks are tightening lending criteria and repayment timeframes. This is largely in response to Reserve Bank measures to douse the surge in house prices and to ensure that mortgage debt is under control for the New Zealand household, including the mandate that this be repaid by retirement age.
My clients are increasingly asking me that if they have surplus cash flow should they use it to reduce borrowing or invest? Each position is personal and dependent on individual circumstances. However, some general concepts may be helpful.
Does your lending facility allow principal repayments without any form of penalty?
Are you on track to have your mortgage cleared by your intended retirement age?
Next, what return will you receive if you make additional principal repayments to your mortgage?
Let’s examine an example where the mortgage rate is 4.5% and you are on a marginal tax rate of 33% which gives a before-tax rate of 5.99%. Clearly, to have an advantage to invest rather than repay debt you would be hoping for gross returns in excess of 5.99%
The problem is that portfolios tend to provide variable returns on a year by year basis so sometimes your return will be higher than the gross cost of your mortgage and another year it will be less. It is only in retrospect that you would know for sure what was the best choice.
The decision as to whether to repay debt or invest must therefore also include other considerations. The first of these is that by investing in a wider diversified portfolio is that you are moving your asset base away from purely property. You should also examine the benefits of compounding returns; in this regard, the earlier that you commence an investment the greater the compound returns will be over time.
You should also consider the challenges of being asset rich and cash poor in retirement. This is the position that is sometimes unintentionally created when most of your wealth has been centred around property…albeit debt free by retirement.
A simple one size fits all approach simply does not apply when you consider the benefits of paying of debt or investing elsewhere.
We have user-friendly, research-backed software which clearly shows our clients where they are at today, provides a discussion point as to how they would like to live in retirement compared to now, and most importantly an opportunity to look at the tools available to them to get there.
A discussion with us today will give you far greater certainty as to your options in the future – and the plans to implement tomorrow to get you there.
Call Lynda on 0800 379 325 or email on firstname.lastname@example.org