Advice wanted: Inheriting $200k - are we right to put it all into the mortgage?

[h0peful4change]

@jansina This is the best answer. That 10% is RISK FREE.

Earning 10% in the stock market is not equivalent (need to be compensated for taking on the risk etc).

 

[diamondriver]

@jansina To add to this another benefit is if you have an offset or redraw facility. If you dont due to the size of your mortgage maybe worth contacting a broker and see if they can get you a better rate with an offset account

 

[maryanne62]

@jansina Can you explain the 6/10% part? I don't understand

 

[gejohn]

@maryanne62 I think 6% untaxed is equivalent to 10% taxed

 

[bootsie1]

@gejohn Yup, cause you need to pay capital gains tax on anything you earn from investments. So the actual number you'll need to earn is more

 

[sun_shine1617]

@bootsie1 You pay income tax on income you earn from investments, for example, interest on deposits, rent from rental property and dividends from shares. You pay CGT when you sell an investment.

The 6%/10% thing is roughly correct, the important point is that reducing your PPOR mortgage loan means you save interest and since you had to pay that interest out of after tax income it saves you a greater amount of pre tax income.

 

[xxxfokaxxx]

@maryanne62 Interest rates currently 6% and any profits from investments would be added to their taxable income and likely push OP to a higher tax bracket (likely around 4% higher)

 

[ced56wes]

@xxxfokaxxx People fixate too much on a higher tax bracket. You go from just under 120k to 125, and you pay an extra 4c on the dollar for that last 5g, or $225.

 

[dmit5487ivan]

@jansina So, I think the returns on the investment need to be lower than the interest rate to "break even", assuming you debt recycle. That's because a chunk of your interest becomes tax deductible.

If you can get the same 6% return, then that probably includes your required risk premium. If you do better than 6%, that's gravy.

That's because by debt recycling, you get a 45% of the interest on the amount bonus to start with from the government.

 

[evh]

@jansina This calc is a bit suss to me... you don't suddenly get that tax back just because you are not paying the mortgage

 

[jansina]

@evh I'm not very good with numbers. What is the grossed up value of say $600 at the higest tax bracket?

 

[nightjay]

@evh If you earn 10% on $1000, it's $100. But at the highest tax rate, you only get to keep $53 - the other $47 goes to the tax man.
If you save 6% on $1000 in your mortgage, it's $60 interest you don't have to pay. Plus, because it's not income, there is no tax to pay. Plus, you get ahead on the mortgage, which saves more compounded interest over time.

 

[evh]

@nightjay Right, but...

Let's say you invested it in an index that returns 10% for the year. You haven't sold it and have continued to hold that investment. That is also not taxed at this point.

Why would we be grossing up interest saved on mortgage to how much of your pre tax income it's saved? Sure, if you have it in a savings account it's going to be taxed at your marginal tax rate, but it's not like that is the only option.