Now, as you have heard before, the answer will start with: ‘It all depends!’
What works for some people will be something very different for others.
Factors which you need to consider include:
- Your age.
- Your risk tolerance.
- What other investments you may have.
Principally, my argument is rates have never been this low. So why wouldn’t you try to pay your mortgage off faster?
However, some people have said they can make far more by investing and going interest-only. More on this in a minute.
- First, let’s consider an $800,000 Auckland mortgage.
- Let’s use 4% interest, just in case rates rise in a couple of years.
- Let’s also assume the loan is paid off over 30 years.
The interest cost over the 30 years — assuming the standard payment is made — is $574,840. And just imagine if rates were ever to get back to, say, 6%! The interest bill would now be $926,560 — or nearly double.
So, if you can borrow at 2.5%, you have to make approximately 3.7% before tax just to be even. For the effort involved and the extra risk, I would want to make 10% a year to make it worthwhile.
- Here is the question: ‘Can you make 10% a year every year for the next 25-30 years?’
- If so, you should borrow and invest.
- If not, then maybe consider paying down the mortgage faster than normal, or at least pay off a percentage to give you a buffer for the rainy day.
What about the stock market?
I have seen some people get lucky and buy Tesla [NASDAQ:TSLA] or Nikola [NASDAQ:NKLA] shares — or perhaps some bitcoin.
But, equally, I have seen others invest and lose.
The longer the time frame you can give yourself, the better the chance to make money investing. Murphy’s Law usually means that the minute you invest, the market self-corrects 10%.
Then you end up wondering what you are doing. You panic and sell at a loss, saying, ‘I am never going to do this again!’
Usually, you could invest in New Zealand blue-chip stocks and collect a dividend much greater than the cost of the borrowing. But even that is getting harder, and more so when the utility stocks — such as Meridian [NZX:MEL], Contact [NZX:CEN], and others — go up 5% a day because BlackRock [NYSE:BLK] and other large international fund managers have NZ’s dividend stocks on their radars.
So, as you can gather, it isn’t simply the case of rocking up and buying the blue-chip stocks, then setting and forgetting. You have to get the buy-in price as good as you can, otherwise you may make 5% from the dividend, but lose 10% on the capital side as the market sinks.
As they say: ‘You pay your money and takes your choice.’
Just make sure you do plenty of due diligence. You may also like to consider some of the recommendations here at Wealth Morning. The premium research service does some heavy lifting for you and provides well-researched recommendations.
‘She’ll be right’ won’t cut it.
My special offer
Of course, it’s no secret: The New Zealand housing market feels like it’s going gangbusters.
You can see it in the news headlines. The property listings. The constant chatter.
There appears to be a whole lot of buying and selling going on, doesn’t it?
With rates at records lows, most Kiwis seem to be experiencing FOMO — Fear of Missing Out.
Amidst this property fever, does this mean it’s time to buy a new house? Review your mortgage arrangements? Take up a fresh loan?
Well, hold on. Not so fast.
Every property situation is unique and presents different challenges. There really is no one-size-fits-all — not even in a housing market as feverish as New Zealand’s.
Before you make the leap, you need to consider all the important facts.
I have over 30 years’ experience in finance and property investment and I could offer you some high-value pointers you might not have thought about.
My approach could potentially save you time and money in the long run — not to mention offer you peace of mind *before* you make a big life decision.
Authorised Financial Adviser, Wealth Morning