What Do you Do When You Finish Paying Your House Off?
by Dominique Schuh
The Australian sharemarket finished in the black as Reserve Bank growth optimism and rebounding iron ore prices buoyed sentiment. Wall Street finished flat last night, but after a choppy start the S&P/ASX 200 index rallied to close up 29.5 points, or 0.52 per cent, at 5651.4 as investors flipped back into the banks and miners climbed. U.S. stocks were little changed late Wednesday morning as investors assessed a flood of quarterly earnings reports. More than half of the S&P 500 companies have reported results so far, with their combined earnings estimated to have risen 8.2 percent - the most in nine quarters.
What this means for you:
What do you do once you've paid your house off? If you're in the fortunate position of having good income, you can use the equity you have in your home to borrow funds and invest in other assets. Preferably those assets will be income producing, which will then allow you to direct additional income streams to paying down the investment debt over time. We often forget about the borrowing power we have in our own homes, and how this can be utilised for wealth creation.
In the last 10 years, the average Australian home loan amount has nearly doubled. House prices continue to soar and affordability is quickly diminishing. Regardless of your stage in life, paying down the mortgage has never been more important. There are two key things you need to understand about your home loan. Firstly, the interest payable isn't tax deductible and so paying it down quickly should be your first priority. That is unless you have credit card debt or a personal loan with a higher interest rate, which should then become your first priority. Secondly, you'll be paying the most interest in the first few years of your loan as the principal amount is at its highest. So, the sooner you can get onto reducing that principal the better off you'll be because your interest will start reducing right away.
So short of finding a secondary income stream, here are some of the best ways to get that loan amount down asap. Refinancing to a lower rate may seem obvious but many people delay this simple move for a number of reasons. Some may be put off by the complexity of switching lenders, especially when they have all their financial products with a specific bank. For others, it may be finding the time to get around to it. But unless switching means paying another round of Lenders Mortgage Insurance or pricey exit fees, refinancing to a lower rate can save thousands in the long run.
Most home loan repayments are calculated on a monthly basis. But fortnightly repayments can serve you in two ways. Firstly, they allow you to squeeze in the equivalent of one extra monthly payment per year. For example, assuming your monthly repayments are $2,000, in a year that means you would have paid off $24,000 ($2,000 x 12). If you're paying fortnightly, you divide your monthly amount in half which makes it $1,000. As there are 26 fortnights in a year your total repayments become $26,000 ($1,000 x 26). This extra amount you've paid comes directly off your loan principal, which in turn reduces the amount of future interest calculated, meaning you pay off your loan sooner.
Income stream versus capital growth in retirement? We often here about people wanting an income stream from their investments in retirement, which makes sense if they are no longer earning an income from work activities. But don't forget, if your retirement assets are held in "pension" phase in your super funds, these will be considered "tax free" and no capital gains tax will be payable if you sell them. The most important factor in retirement is the overall return you receive, not necessarily whether it comes from income or capital gains.