I have an investment property that covers my principal and interest payment. Am I better off paying down the mortgage instead of carrying it out for the 30 year term, or allow the investment property to pay off the mortgage over the 30 year period and invest what i would have used to pay down the mortgage?
Marilyn
Comments
my other half is big into property and had made a lot of money doing so he currently lives out of the country to avoid taxes and he would say rent all the way and invest in another x
Paying it off ASAP will help your bottom line in the long run, as you will have more cash available and be able to be more flexible with your money once the loan is gone.
I would pay the mortgage down early, without relying on the renters covering the payment. That will protect you in the event that you can’t get renters for a while (economic downturn or some other issue you can’t control) or interest rates going sky high.
You will get a far better return if you reduce your interest costs than you would if you invested the money. Here’s why.
Say you borrow $100 000 at 6%, with repayments of $150 a week. Over 30 years, it will cost about $116 000 in interest. That’s on top of the payments, so adding the principle to that means you’ve spent $216 000 to pay off $100 000.
I’ll just guess (you haven’t told us how much extra you’d be adding to the mortgage) that you pay double repayments, which would take repayments to $300 a week. That would clear the mortgage in a little over 9 years, and only cost about $130 800 to do so. That’s only $30 800 in interest.
If you instead invested that extra $150 a week ($600 a month) at 4% interest for 30 years, you’d have over $416 000 on paper, but about a quarter of that at least would go in tax. That investment would reap income, but it would be taxable income. So you’d probably come out with an effective return of about 3%, which would be just ahead of inflation. So you’d be left with about $350 000, minus the $116 000 you’ve paid on interest, leaves you with a return, after 30 years, of $234 000. Taking into account inflation, the value of this after 30 years would be much less. It would probably only be worth about half of that, or $117 000.
However, paying the homeloan out in 9 years frees you to put the entire amount (rental income and personal contribution) into an investment. That makes it $1200 a month over 20 years at $393 962 before inflation, or just under $200 000 in today’s dollars. That’s not including capital gains on the investment property.
I’d pay the mortgage out early, to reduce your debt burden, and then consider buying another investment property. You’d be better off in the long run.
Best wishes
