The question of whether to focus on the repayment of your home loan or start investing now is a question many people ask when considering their financial future. 

With share markets down (the Australian share market is down 8% since the start of 2022 and the US market down 20% over the same time) would be investors may now be thinking it is a good time to invest. 

However, if you have a home loan you have also seen interest rates increase and your repayments increase as well.  Average home loan rates are now around 4.5%, and further increases are likely as the Reserve Bank continues to raise the cash rate in an attempt to rein in inflation. 

Making extra repayments on your home loan provides a guaranteed rate of return, as the extra repayments reduce your loan and save on the interest bill over the life of your loan.  For those on the top marginal tax rate of 47% including Medicare, the guaranteed return at current loan rates is equal to a before tax investment return of 8.5% per annum. 

So, the question has to be asked, can you get a guaranteed return of 8.5% per annum? 

While it might be possible over the longer term to attain such a return, it certainly won’t be guaranteed as you would need to be investing in assets that are subject to market fluctuations, such as shares and property.   

Interest rates are expected to continue rising through to 2023, so those with a home loan would be well advised to focus on reducing their home loan as quickly as they can.  This will reduce the long-term cost of loan interest, increase future savings capacity once the loan has been repaid, and build equity in your home.  It also provides a further cushion against future interest rate hikes. 

But what can be done now for those wanting to invest? 

Those with secure income and equity in their home could consider borrowing money secured against their home for investment.  This is a higher risk strategy that gives homeowners the opportunity to invest now while they continue to focus on repaying their home loan.  Interest on the investment loan is usually tax deductible (have a chat to your tax agent to confirm), and the reinvestment of investment income over time can help the investments compound in value.  One outcome of the strategy for investments that have appreciated in value is to sell some down, with proceeds used to help repay your home loan. 

If you are interested in such a strategy, please get advice first to make sure it is appropriate for you. As an experienced, independent financial advice and wealth management firm we suggest the key issues to consider are: 

• What happens if your income changes (ie. you lose your job or change jobs to a lower paid role)? 
• What happens if you become ill or are injured and cannot work for a period? 
• How can you avoid being a forced seller of the investments, particularly at a time where they have fallen in price below their purchase value? 
• What is your exit strategy and what are the tax implications of selling assets to repay the investment debt? 

At Hewison Private Wealth we advocate taking the least amount of risk possible to achieve your goals.  As a result, we often recommend investors focus on repaying their home loans as a priority.  If you are looking for advice about what to do next in your wealth accumulation journey, please give one of our advisers a call on 03 8548 4800 or visit our website HERE