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 … Continue reading Pay down debt or invest funds elsewhere, there is a lot to think about!