When it comes to making the most of your finances, one of the big questions is: do I pay off my home loan, or invest? Unfortunately, there’s no one-size-fits-all solution, but it’s important to consider your personal financial situation when working out what’s best for you.
How big is your mortgage?
The size of your mortgage is important when it comes to determining whether you throw more into your home loan or buy an investment property. The choice will be taken out of your hands if your mortgage is 80% or more of the current value of your home. If this is the case, your best option is to pay down your home loan and increase your equity. Even with more than 20% equity in your home, most lenders will let you borrow against only 75-90% of total equity.
Paying down your home loan
Making extra mortgage repayments allows you to reduce your loan balance and maximise the equity in your home. Paying more into your home loan could work for you if:
- You enjoy spending (a little too much) – scheduling extra repayments may help with financial discipline.
- You still have a large loan balance approaching retirement – paying down your mortgage quickly is a good option.
- You want to release guarantors on your mortgage.
Making extra repayments helps reduce the term of your loan and amount of interest you pay in the long term, while maximising your available equity. However, be aware that if you pay extra directly into your mortgage, you may not be able to easily access these funds if you need them.
Investing in property
If you’re in a position to invest, researching the investment property market can certainly help with your decision making. If you owe less than 80% of your property’s value on your home loan, you may be able to release equity as a deposit to buy an investment property.
There are a few things to consider when it comes to investing in property:
- You may need to make some lifestyle changes. Things like taking holidays, changing jobs, home improvements or having another child may need to be put on hold while you adjust to your new financial situation.
- You may be hit with a “break cost” from your lender when you refinance your home loan to access the equity.
- It’s important to ensure you have access to emergency funds for unexpected costs like maintenance and repairs.
Of course, a positive of property investment is that any losses you incur relating to the property are tax-deductible and can be claimed at tax time through negative gearing.
Take a look at our Property Investment for Beginner's Guide to learn more about how to get into the market as an investor and what your main considerations should be.
If you’re trying to decide whether to pay more into your home loan or buy an investment property, your Mortgage Choice broker can help you assess the most suitable option for your personal financial situation.