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Blog

May 12th, 2015
There’s no place like the home loan by Daniel Martinez

If you’ve got a mortgage and you’re wondering where to invest some money then the answer could be right under your nose.

How about ‘investing’ in the mortgage.

Ok, so investing in the mortgage doesn’t make a great BBQ story right? Wrong.  I reckon it just might.

Let’s say you earn $85,000 salary per year and you have some cash to invest.  What are your options?  Put it in a bank account?  Yes…Buy some shares?  Yes….Pay off the home loan?  Yes.

Let’s look at the bank account scenario first.  What are bank interest rates at the moment? Well, they’re paying around 3% [i].  Not good.   And they’re only going to go lower in the near term.  But that’s another story.

Now, let’s compare that to the humble mortgage.  I reckon the average mortgage rate out there at the moment is about 5.5%[ii].    If the investor places their spare cash against their mortgage the investor saves 5.5% on every dollar.  That’s heaps better than the 3% being offered by banks on their deposits.

The comparison is even more compelling in favor of the humble mortgage when you take tax into account.  Why?  Because the investor pays tax on interest earned on the bank deposit but the interest saved on the mortgage is completely tax free.  In other words, the bank deposit interest of 3% is ‘before tax’ whereas the mortgage rate of 5.5% is ‘after tax’.

Once you deduct tax[iii] from the interest on the bank account the return on the bank deposit drops to less than 2% pa.

Another way of looking at it is if the investor wanted to find a bank account where they could earn 5.5% after tax they would need to find a bank that is offering a whopping 8.7% per year!  If you find a bank offering 8.7% p.a. on one of their deposit accounts let me know because I will be first in the queue.

I’m sure there are some shares out there that are paying dividends equivalent to 8.7% [iv]p.a.  But I bet they come with a fair bit of risk.  That’s where the other massive advantage of ‘investing’ in your home loan comes into play.  The interest saved on your mortgage is completely risk free.  In other words, the interest saving is guaranteed. I am sure there is no other investment out there in the market place that offers 8.7% p.a. (5.5% after tax) risk free.  As I said, you will probably find a share out there paying 8.7% but it won’t come without significant risk to your capital.  With your home mortgage, you can sleep easy knowing that every dollar you pay off your home loan has a guaranteed return of 8.7% p.a.  As they say in the classics ‘lock it in Eddie’.

You now have an investment that is offering a really good return that is completely risk free and tax free.  Maybe this story is worth telling at your next BBQ after all.

Bye for now

Dan’s Corner

[i] Australian Money Market website

[ii] Canstar website

[iii] The highest marginal tax rate for someone earning $85,000 per year is 37%

[iv] Woodside Petroleum

PFG Financial  Services Pty Limited (ABN 23 052 977 189) and PFG Global Pty Ltd (ABN 50 679 416 839) trading as PFG Financial Services (Global) is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327 Australian Financial Services Licence 232706 and Australian Credit Licence 232706.

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