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The Pros & Cons with Paying Off Principal
By Regina Looi
Question:
I'm about to pay off my owner-occupied home within a year. I have an investment property which I set up as an interest-only loan. My question is when I pay off my home loan, do I keep my investment loan as interest-only or do I switch to P&I? And why? Elias Nemr
Answer:
Dear Elias,
Thank you for your “Ask the Experts” question. First of all, let me congratulate you on almost paying off your home, as well as having taken that first step towards financial independence by already owning one investment property.
You have asked us whether it’s better to keep your investment loan as interest only or to switch to a principal and interest loan when you finish paying off your home loan. The answer is definitely to keep your investment loan as interest only and never pay it off if you can help it.
At Investors Direct, we think of a mortgage as an asset which may sound strange to you if you have never heard of this concept before as most people think of a mortgage as a liability, which is also why most people want to pay it off and get rid of it as quickly as possible.
However, if you can understand why a mortgage is an asset and how acquiring mortgages will help you to create wealth faster, you will never want to pay off your mortgage. On the contrary, you will actually want to acquire more mortgages as quickly as possible, and obviously the only way to do that is to acquire more properties to enable you to take out the mortgages.
No one explains this concept of a mortgage being your asset better than our CEO Bill Zheng, who devoted a whole article in our July newsletter explaining this revolutionary concept. I highly recommend that you take the opportunity to read the article by clicking here
If you have a chance to read the article and understand the concept of a mortgage being an asset, you will start to see finance in a different light. A mortgage will lose value over time due to inflation, so why would you use your hard earned money to reduce it further?
Furthermore, paying off principle negates any potential tax benefit you may have by claiming the interest as an expense against the investment. If you feel you have to reduce the debt, most interest only loans allow you to do that by paying extra repayments that come directly off the principle. In addition, if you have a redraw facility, you can still access these extra funds whenever you wish. It’s the best of both worlds.
So in summary there are 3 main reasons why I would encourage you to keep your investment debt as interest only:
1) it will leave you with additional cash for either personal lifestyle or alternatively to be able to contribute towards another investment property
2) as far as negative gearing benefits are concerned, if you reduce your debt, you also reduce your tax benefits.
3) Money loses its value over time, so why pay back any more than you have to?
You’d be much better off using the money that you save to go towards a deposit for another property (so you can take out another mortgage) or help to cover monthly shortfall of your properties (to help you hold on to your mortgages once you’ve got them). At the same time that your mortgage is decreasing in value, your property continues to grow in value. Your net worth increasing every year as the gap between the two increases.
I am not suggesting that you simply take out as many mortgages as you can without proper planning or putting the correct strategies in place. That would be foolish and risky. Our finance strategists are trained to recommend a strategy for you to acquire mortgages, and the properties that go with them, safely, and within your comfort level.
Now that you understand how a mortgage can be an asset, my question to you is, why wait for another year for your home loan to be paid off? You should already have built up sufficient equity in your home to enable you to immediately increase the number of assets you control.
I guarantee it will be well worth your while to have a consultation with one of our finance strategists to find out how you can put a plan in place to increase your net worth using this concept of mortgages being an asset.
This article was written by Regina Looi. Regina has an in depth knowledge of the finance industry having been with Investors Direct for 3 years and prior to that spent 10 years working at a major bank. She is a passionate and experienced investor. She has been investing for 6 years and owns 6 properties.
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