# What to do...pay off mortgage, invest in stocks or...??



## navtek (20 November 2007)

Hi All,

I am in a situation where we are just not to sure on where to go next. We are both in our mid 20's, have purchased a home about 9 months ago in a really good area (we think so..) with bit of equity already in the property. We both work in pretty good jobs and are comfortably paying off the mortgage

We are a little hesitant about investing more into the housing market and are looking at diversifying in shares. We have seen a couple of financial planners and at the moment we are leaning towards investing with capital protected funds over a 7 year period i think it is. we are really looking for something that will increase our wealth over the next 7+ years

Anyone had any experiences with capital protected funds? Any other ideas or suggestions?

Sorry for the long post..


----------



## Buster (20 November 2007)

*Re: What to do...*

G'Day Navtek,

If you've not yet payed off your mortgage, put the extra cash into that and pay it off as soon as possible.. non deductible debts and all that..

In the meantime, hang around this forum asking questions (there are some knowledgeable posters here..) get hold of some books, and try your hand at paper trading for a while..  

Sounds like you've got plenty of time to learn if you're only in the mid 20's.. 

Regards,

Buster


----------



## tech/a (20 November 2007)

*Re: What to do...*



> If you've not yet payed off your mortgage, put the extra cash into that and pay it off as soon as possible.. non deductible debts and all that..




Ask yourself or your advisor this.
Will my *NETT* (fees,Tax etc) return likely to be greater than the interest bill on my mortgage.
Think you'll find it will have to return over 20%---not probable Id suggest.


----------



## Snagglepuss (20 November 2007)

*Re: What to do...*

I'm no expert, and I haven't used them, but I believe that capital protected funds are quite expensive, in the sense that you end up paying quite a bit (indirectly) for the capital protection feature. You need to consider this versus your degree of risk aversion. (A good financial planner will have asked you about this.)

If I was in your situation with (i) your youth, (ii) your existing property holding, (iii) your time horizon, (iv) your (assumed) good earning power, then I would probably invest in one, or a small number, of good NON-capital-protected managed funds.

Unless you want to invest directly in stocks yourself ... ?

- Snaggle.


----------



## Garpal Gumnut (20 November 2007)

*Re: What to do...*



navtek said:


> Hi All,
> 
> I am in a situation where we are just not to sure on where to go next. We are both in our mid 20's, have purchased a home about 9 months ago in a really good area (we think so..) with bit of equity already in the property. We both work in pretty good jobs and are comfortably paying off the mortgage
> 
> ...




I'd suggest 

1.  Pay off the mortgage.   A good way to decrease interest payments which are not tax deductible and its a roof over your head.

2.  Avoid financial planners.  Are they the source of your ideas on capital protected investments, an expensive way to go.??

3.  Continue to read ASF.

4.  When you have a sufficient income to borrow to invest (margin) net of your mortgage payments, _or _you have enough capital, knowledge and  nerve to lose money invested, then look at the share market. 

gg


----------



## navtek (21 November 2007)

*Re: What to do...*

First I would like to thank everyone for the replies..

Paying off our mortgage is one of our high priorities. I agree with trying to pay off our mortgage however for me the downside to that is there are no tax deductions and that I am having all my money tied up in my home or the housing market, so if the housing market goes down so does my investment. 

The Finacial planners did come up with the capital protected funds idea, it sounded good on paper but i guess there is some more reading to do. any other suggestions? Basically we were going to borrow about 100k, either against the house or from some sought of capital protected fund. We talked about margin lending however that didnt appeal to us. With this borrowed money, we would invest in some sought of managed fund. 

We are at a stage where we kinda just want to put money aside each month and let the fund managers deal with it. I'm probably in the wrong forum but I don't really have the time/brain power to paper trade and choose my own stocks etc. I have done a little forex trading (paper only) but as usual life gets in the way.

Thanks again for all the replies. Any other comments are appreciated.


----------



## Uncle Festivus (21 November 2007)

*Re: What to do...*

What about....

Sell your house, rent, invest the rest?

In light of current world financial events, the age of easy? returns may be at an end?

In these times those who are debt free will be worry free?


----------



## Timmy (21 November 2007)

*Re: What to do...*

3 out of 4 of the above posters suggest paying off your mortgage first.  If you ask for the advice you owe it to yourself to at least ask yourself why they would say this.  

It has nothing to do with having all your eggs in one basket, exposure to the housing market, etc.  It has everything to do with the interest on your mortgage being 100% paid by you out of after-tax income.


----------



## Timmy (21 November 2007)

*Re: What to do...*

3 out of 5 by the time I hit submit.


----------



## xtanda (21 November 2007)

*Re: What to do...*

navtek,
I beg to be different. But please note that what I share below is advanced thought and not an advice. It's only my own experience.

I was in similar situation with yours. I agree with the other posting about financial planner. I just forget them but I massively educate myself about investing, change the mortgage to interest only (so I pay less), save the extra money for investing/capital and got life & income protection insurance.

Yes, I don't bother about paying off my mortgage. If something happened to me the bank through my insurance will pay off all the debt/mortgage. 
My thought: say if I have $300k cash now, which one is better: pay off my mortgage (and I still own 1 property) or buy 3 more properties or invest in sharemarket or a bit of both. Controlling vs Owning. Normally all the riches will prefer having 4 properties full of debt than only 1 without debt. *As long as I can still manage the cash flow*. 

Think about it and decide yourself!


----------



## Julia (21 November 2007)

*Re: What to do...*

Whilst I agree with the others who have made the very practical suggestion that paying off the mortgage should be the first priority, I'm wondering if what you are looking for is having a sense of "doing something else as well"?
Some sort of tentative step into the world of investing, and hence the thought of going for the option where someone else takes the responsibility of choosing the investment while keeping your capital safe with a Capital Protected Fund?

How would it be if instead of doing that - and paying all the fees involved - you were to just buy for a start a couple of blue chip shares?  That would allow you to get a sense of the sharemarket and be unlikely to really be putting your money at risk.  e.g. if you were to buy some BHP and Woolworths (this is not advice btw) and take a 5 year time frame, you would be very unlucky not to achieve considerable growth, and would have some dividends and franking credits coming in as well, though these are minimal in the case of these two companies.   Or buy a solid infrastructure or property trust if you'd prefer slower growth and high dividends.

Just another option to consider perhaps.


----------



## navtek (21 November 2007)

*Re: What to do...*

Paying off the mortgage definitely seems the most popular bit of advice. Couple of things though that i am a little confused about

1. how will this help me with reducing my tax as all the repayments on the mortgage aren't tax deductable

2. if my aim is to reduce to mortgage wouldn't it be better to invest my extra cash flow by investing into something else that will help me reduce my mortgage as well as reducing my tax? 

I'm not against paying off the mortgage, im just trying to understand the reasoning behind it and why 90% of posts is against investing my extra cashflow in other investments such as the stock market. 

we are looking at other aspects of investment that may help us with the other things in life eg holidays, cars, house renovations etc..


----------



## RichKid (21 November 2007)

*Re: What to do...*



xtanda said:


> navtek,
> ...........Controlling vs Owning. Normally all the riches will prefer having 4 properties full of debt than only 1 without debt. *As long as I can still manage the cash flow*.
> 
> Think about it and decide yourself!




That's an important concept that I'm still only learning about- the benefits of ownership without the full costs of ownership (while being able to service any related debts of course). It allows you to use your capital more efficiently. Just ideas, not sure what will suit a particular individual, everything has to be taken into consideration.


----------



## niknah (21 November 2007)

*Re: What to do...*

I was sort of in your situation during the early years of this commodities boom, I put the moneys away into the mortgage to make myself feel more secure, but if I had put moneys into the stock market and kept a large mortgage I would have had more in the end.  In the long run the stock market on average grows more than the average home loan interest rate.

You may have heard of the formula "risk = return"
Capital protection = no risk.  
I haven't taken a look at it but it's probably = no return too.  If it was no risk + good return the whole world would be on it.

It sounds like you want some safety, here's some no brainer stocks...
STW is the top 200 public companies in aust.
IVE is the top 800 approx. public companies in the world.

Financial planners, please take note of what commission they're taking + the fund's commissions, the above stocks have <0.4% management fees.  Most actively managed funds do not do better than the index funds + take more commission.


----------



## xtanda (21 November 2007)

*Re: What to do...*

navtek,
why paying off mortgage is popular ? because that's the easiest and the most classical traditional believe: you have debt, pay it off then you are free. or is it ?

one need to remember as well that one of the key to wealth is using 'Other People Money' , so people like me who doesn't have capital/inheritance to start with can achieve wealth as well... Leverage! that one key factor.

Many of us, including people around me, also is not really comfortable with the concept of "comfortable with debt". Once they overcome this, everything else it will be easier.



navtek said:


> 1. how will this help me with reducing my tax as all the repayments on the mortgage aren't tax deductable




Unfortunately, your own home is not tax deductible. So, reducing the repayment (e.g: change to interest only instead of P&I) and use the extra money to invest will help. 

Or you may explore the possibility to setup a trust, sell your home to the trust (cost you hefty stamp duty, as you need to sell at market price) and rent from the trust. This is really advance concept that I will not recommend for you to do DIY without professional advice (accountant, lawyer or portfolio strategist). This strategy as my understanding is 101% totally legal, but if your professional doesn't know how to do it ... they will tell you it's not, while the thing is they don't know how to setup correctly... In long term the advantage is huge, but it involve upfront fee (setup cost, stamp duty) and maintenance fee (trust tax return, etc)




navtek said:


> 2. if my aim is to reduce to mortgage wouldn't it be better to invest my extra cash flow by investing into something else that will help me reduce my mortgage as well as reducing my tax?




Yes, put your money in asset that can produce growth/income that's a good choice !


----------



## tieyouup (22 November 2007)

Hey Navtek,
This is my idea and mine alone, what ive done

step 1 decide when you want the little one's this is IMPortant

step 2 get more equity in the house the most you can both afford, for the next year or two the more the better. Hound that loan.

step 3 play a share game or two during this time and understand the markets and whats available, read up. Change of Gov. soon, so things will change.

step 4 A loan IS NOT a bad thing as long as its managable so make it managable during this time. Even if you have to miss out on something. Me, i hate loans so my house is 80% payed off in 6yr's

step 5 Now is the time to think about cutting back the house loan to interest only and investing with margin lending and warrents making all fee's tax deducable.

step 6 see step 1 and remember the romance through all steps

step 7 dont forget retirement and your super

Im talking at least 6 yrs here without more info from you this is the best i can say and what ive done


----------



## DionM (22 November 2007)

My experience and comments.

We're in a similar situation, and recently borrowed against the equity in our house to invest in shares.  

Why?

Well, we did our sums and figured we could spare around $200 wk to invest.  Reverse-engineering that I worked out the amout of loan we could service, and got that.

Then I bought some shares.  I have about 15% as speccies (mostly mining explorers), 45% in dividend paying quality bluechip shares (e.g. BHP), 20% in dividend paying shares that aren't quite bluechips (eg PSH), and 20% in non dividend playing shares that have some quality to them (eg NMS).  I wish I had stayed away from the speccies, but anyway, at least I learnt early and didn't blow the entire investment on them!

I have some dividend paying shares so I at least get some return while I own them, but ultimately most of them are bought with considering for rises in SP as well.

The interest deductions on the loan are nice, but that wasn't the main driver.   My main rule is to treat the tax benefits as a bonus, not as an integral part (ie not factored in).

Also, read up about those capital protected borrowings on ato.gov.au.  The tax treatment for interest deductions is special.


----------



## saichuen (22 November 2007)

These are the figures that I've been trying to work out and digest for a while now...

To make available new fund for investing purposes,  I can either: 

1) Use a line of credit to borrow against the equity in the house - the interest is around 9% p.a. or so.

Or

2) Borrow more by toping-up the existing loan - the interest is around 8% p.a. or so.

And if you're are planning to use this new fund to invest (shares, etc.), then I would imagine you'll need to a make a profit of at least more than this borrowing cost incurred. The question now is at what profit percentage will be worth your effort in doing so? Anywhere from 15-20% p.a. perhaps?

Also, I have already some extra cash at hand currently invested in shares. Using the same logic above, if I don't get a return between 15-20%, then it's probably easier to just put this cash into the home loan's offset account and earn the 8% p.a. interest instead? 

Any comments?


----------



## koylez (22 November 2007)

I'm in the same situation, bought a house this year, have paid extra into the house and the value of the property has gone up, so have some equity. I've been thinking about implementing debt recycling, where you take out an interest only loan investment loan with your equity as collaterol to buy shares that pay dividends. Your interest only loan is then tax deductible as it is for investment purposes. 

During the year, pay any dividends into the home loan, and any extra money you have, put it in the home loan. At the end of the year, increase your interest only loan by the amount extra you paid off during the year. The aim in the end then is to have your home paid off, but be replaced with an interest only loan on shares that have gained in value. Still reading more into it though.


----------



## Flying Fish (22 November 2007)

Sounds good koyloz


----------



## DionM (22 November 2007)

koylez said:


> I'm in the same situation, bought a house this year, have paid extra into the house and the value of the property has gone up, so have some equity. I've been thinking about implementing debt recycling, where you take out an interest only loan investment loan with your equity as collaterol to buy shares that pay dividends. Your interest only loan is then tax deductible as it is for investment purposes.
> 
> During the year, pay any dividends into the home loan, and any extra money you have, put it in the home loan. At the end of the year, increase your interest only loan by the amount extra you paid off during the year. The aim in the end then is to have your home paid off, but be replaced with an interest only loan on shares that have gained in value. Still reading more into it though.




My approach is a little different.

I put in a fixed amount each week into my investment loan, effecting paying P+I.  $250 I think it is at present.  I'm comfortable with that commitment, it is what I may have put towards a managed fund or the like.  Sort of like 'enforced saving'.

I have availed myself of all DRPs where possible, and any cash dividends go back into the loan.  Not all my shares pay dividends anyway.

As the loan goes down and some money frees up (line of credit), I acquire more shares.


----------



## happytrader (22 November 2007)

Hi Navtek

Paying off personal debt is always a good plan. The fact that you have a good job and have the ability to make your mortgage payments comfortably puts you in a position to invest.

Have you thought of borrowing to buy bluechip shares such as banks or gold and renting them out via call or put options on a monthly basis to derive income?

Cheers
Happytrader


----------



## son of baglimit (22 November 2007)

paying off as much of the mortgage at this stage of your life is sound advice.

but dont let that discourage you from making some level of investment, even just to get your feet wet.

pick a small % of your annual income you can afford to live without, and find 1 or 2 stocks that, irrespective of what others say, are of interest to you and therefore wont be a chore to investigate, analyse etc.......may be its shares in your employer, a competitor, something you have good sound knowledge of.
THEN come back to this forum to see what consensus is on the quality of that stock - that doesnt mean they are right, but just to get a feel.

then take that first plunge - sign up with one of those online brokers that offers trades for around $30 or less, plenty of free research etc.
once youve committed, dont immerse yourself in the day to day movements, maybe just weekly check the saturday share listings to see how they are going.

then comes the fun bit.......currently the market is being spooked - and plenty of folk dont know which way to go - invest heavily now cos the bottom is here, or sell everything and run for the hills......

in your case, do nothing, except do some reading to understand why its going up or down and wait......and when EVERYONE agrees the share market sux and its no place to make money, thats the perfect time to jump in harder.


----------

