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I've recently taken on a new mortgage and have a small amount of leftover money each month, am I better to pay it into the mortgage or are there investments that will perform well enough to offset the mortgage interest?

8 years ago

Firstly dont leave yourself short - cashflow is king. If you can spare the cash then consider additional payments that are then available for redraw.

Most/all loans have a redraw facility with unlimited cash back for extra payments for variable loans with limitations on the maximum deposit and subsequent redraw available on fixed loans.


The answer depends on the level of risk you are prepared to take on? Given the record low interest rates we are experiencing currently, placing your money in an offset account to offset the mortgage interest is a smart move. Generally speaking, the deposit rates and term deposit rates are not currently attractive enough - also bear in mind... You will pay tax on any interest earned which will be offset against your returned rate. Of course there are other categories of investments that can achieve more attractive returns however may attract greater risk profile and require larger amounts invested as well.

John Maxwell
Cocalex Consulting
Business & Finance Consultant

Hi Rob,
That is a great question and with interest rates at historical lows as they are currently, it is a question that many other people are asking as well.
There is no hard & fast rule with how to structure your personal debts vs your investments, there may definitely be opportunities to look at an investment that may give a greater return than the interest that is being offset but whether or not these investments are right for you will depend on a few key things.

Firstly, assuming that the loan you are referring to is for your own home, it would be classified as a non-deductible debt. It is always preferable to try and reduce your non-deductible debts first as there are no immediate tax benefits of keeping this debt high. Also it can be beneficial to build up the equity in your home. You may then be able to borrow against this equity and use these funds to invest, the interest repayments from which would be tax deductible. Key benefits of this strategy is that your debt is now a deductible debt and the rates at which you can borrow against equity are typically lower than investment or margin loans.

One key thing to take in to account when deciding if a strategy such as this is appropriate to you is your marginal tax rate. This type of approach is best suited towards people in higher tax brackets because the interest repayments can be claimed as a deduction and would therefore lower their relatively high level of assessable income.

Secondly, what are your time frames? Most investments (excluding day trading) require a typical time horizon of between 5-7 years at a minimum. These types of investments can include Managed Funds, ETF's and direct shares and even direct properties. It may not be appropriate to be allocating surplus funds to an investment if you could realistically need those funds available for any number of reasons i.e. holidays, upgrade in vehicles, medical costs, emergency funds etc.

Owning direct shares within Australia can have added tax benefits through the use of franked dividend and franking credits but this would again be most effective for individuals on a higher Marginal Tax Rate.

The last and most important consideration to work out what is your overall strategy. What this can be an integral part to investing successfully. What I mean by this, is that it helps to have a clear understanding of your longer term objectives and WHY it is we want to invest and what are the outcomes are that we are looking to achieve.

If you would like to chat about this further feel free to give me a call or shoot me an email.
Kind regards
Marcus Netto
02 9251 5558

Your question is very common Rob, and one I hear regularly. If you have an Offset Account attached to your home loan, hold the extra payments in there until you identify an investment. An Offset Account allows you to have immediate access to your funds, whereas if you pay the funds into your home loan, there may be a time delay in gaining access to them.
You don't receive any interest on your savings in the Offset, but each dollar held there means that the lender is not charging you interest on your home loan for a equivalent amount. In effect, you are "earning" interest at whatever your home loan interest rate is, because you are not being charged loan interest on the amount you have in your Offset.

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