Pay down mortgage or invest

[lesnock]

Looking for genuine advice. I (35) and my partner (38) have two young kids and salaries of $270k and $42k respectively. We have a $1.5m mortgage on a house we built (finished last year) worth c. $2.3m with current repayments of c.$1,800 p/w. Most of the loan (75%) is currently interest only on a Back My Build floating discount (which we lose in April next year).

We end up with about $4k in savings a month (or maybe a bit more) and have a $50k (net) bonus coming in October.

Should we be trying to invest our monthly savings? If so where? Or should we just be paying down debt given the current interest rate environment?

[edit] just wanted to say thanks to everyone for the great responses. Got me thinking and I think I’m settled on the strategy of paying down as much principal as I can.

 

[fola]

@lesnock I would recommend that you use your savings to pay down the mortgage.

The savings that you will make by avoiding future interest payments are mathematically equivalent to investment returns because any money that is not spent on finance costs is money you have earned by making the repayment. However there is one subtle but important difference - unlike other investments, the return that comes from avoiding interest payments can never be taxed since there is no income transaction to tax.

 

[lesnock]

@fola That’s legit. I think the strategy for me is pretty clear. Thanks very much

 

[las_mee32]

@lesnock A $1.5m mortgage on current rates is around $4300/fortnight (P+I), which is likely most if not all of your monthly savings.

 

[lesnock]

@las_mee32 That’s right- it’s the P that I’m not paying that frees up cashflow. I would prefer to pay down more P but I’m not a finance expert (by any means) so I’m trying to work out how to balance everything.

 

[las_mee32]

@lesnock You’re essentially borrowing against your property to invest in stocks. Can you afford for your stocks to halve? What’s your plan for paying the debt down on your house?

 

[lesnock]

@las_mee32 Yeah, you’re right. Borrowing to invest in stocks feels like a terrible idea right now.

 

[richelleygirl]

@lesnock Why? If you’re investing for the long term there’s never a bad time to invest in stocks. Time in the market always wins.
If you are investing for the short term that’s a different story.

 

[blessedisshe]

@lesnock Unless you have something that is returning 10% after tax, on your savings, then the common financial advice is to pay the mortgage down.

But you are obviously smart, unless you are a politician or realtor, as you are earning a good whack of dough

 

[old_man_sinner]

@blessedisshe Exactly.

Maybe even more than 10% because this person is on the 39% tax rate and rates are close to 7%

 

[lesnock]

@blessedisshe Thanks very much. That makes sense to me. The thing I keep thinking about is the common advice to be balanced and always be investing/saving. At the moment it just feels like it doesn’t make sense for us.

 

[vobble]

@lesnock You’re doing well income wise. What is your confidence in being able to continue in your career and earning capacity over the long term?
I’m about your age with a high stress (and paid) job but recognize that I won’t be able to put off the burn-out for much longer, so I have chosen to pay down debts as much as possible to relieve that stress when the day comes that I need to step away.

 

[lesnock]

@vobble Funny you should say that. I’m literally reading The Power of Full engagement in a cafe right now as I juggle the same thoughts. Building during COVID was tough with a young family and the job has grown so it’s been a challenging couple of years.

For me the question is whether I love what I do (which I do) and then can I develop the wisdom to do it in a sustainable way. I think it’s possible.

You have my very best wishes for your version of that journey.

 

[taylorgal53]

@lesnock Jesus man. Why would you borrow from your house to put into stocks in this climate. I get the whole buy when other are fearful thing. But you need to be able to afford it.

Pay down debt.

 

[unlitmikey]

@lesnock Pay down your mortgage but keep an emergency fund. If you have an emergency fund of $50k, then get an offset mortgage of $50k (or whatever your emergency fund is). Only use the emergency fund for real emergencies.

 

[amireallyokay]

@lesnock Its a decision only you can make, but I'm definitely in favour of paying off interest-loaded debt as quickly as possible.

 

[kpec3arrival]

@lesnock Off topic but very curious what field you are in that pays 270k? Goals!

 

[lesnock]

@kpec3arrival Ex-professional services now GM in a corporate. It’s a challenging job but I love it.

 

[kpec3arrival]

@lesnock Thank you for the response! Awesome

 

[anniejey]

@lesnock Can you say what type of field/sector? Very impressed with the salary