Now that I’ve finished paying off my student loan, my husband and I have $1,100 extra each month. We’re not sure what to do with it, so I’m looking for advice here.
We own our current house (1 bedroom) but still owe $440k at a 6.84% interest rate, which we’ll need to re-fix in May. We plan to move in a year or two to start a family, but we’ll need to sell this house to fund the next one. We expect to get only 25% from the sale as a deposit, so we need to save more.
We’re already saving about $3,000 each month for our next deposit. Should we use the extra $1,100 to pay more toward the mortgage or invest it? Our investment fund has been returning about 10% annually, which is higher than the mortgage rate. Yes, I know there’s risk in investing short-term, but we’re okay with that for now.
If you want a guaranteed return, pay extra on the mortgage. It saves you the 6.84% interest. Investing might give you more, but it’s riskier. Paying off debt is safer.
Harley said:
If you want a guaranteed return, pay extra on the mortgage. It saves you the 6.84% interest. Investing might give you more, but it’s riskier. Paying off debt is safer.
How can you say it’s a 6.84% return without knowing the future rates?
Have you thought about the taxes on investments? With the mortgage interest so high, it’s better to pay it off. Maybe set up an offset account so you can access the money if needed.
When you pay extra, you save on future interest, not lose money. Whether you invest depends on if you think your returns will beat the interest savings. Remember, you pay taxes on investment gains, but not on interest saved.
You might want to look into ‘debt recycling.’ It’s not for everyone, but it could help if you’re comfortable with risk. Paying down the mortgage builds equity for your next home.
Use an offset or revolving credit account to pay extra but still have access to the money if needed. If the market drops, you’ll owe less. Paying off debt is a sure way to save money.