Re-think your wealth strategy: pay off your home loan or invest?
With the RBA board due to meet on 6 October, speculation is mounting as to whether they will reduce interest rates further in a bid to stimulate the economy.
Since 2016, interest rates have been reduced five times and are now at an historical all-time low, and while Australia has weathered the COVID storm quite well, I don’t think anyone would agree that the economy is in great shape.
The stock market is recognised as a leading indicator of the economy. If we look back at the growth of the All Ordinaries Index since 1 January 2016, we find that it has risen just over 13 per cent, which is not that spectacular. Nor is it a sign of a booming economy, so you have to question whether lowering interest rates has been beneficial.
In March of this year, the RBA dropped interest rates twice down to 0.25 per cent due to the COVID-19 pandemic. While lower interest rates have made it a little easier for those with mortgages, you have to ask if it has really stimulated the economy.
At a quarter of a per cent, interest rates can’t go much lower, so I doubt a further drop will do much.
Instead it is time to re-think the strategy, as I suspect that the Government's continued support for Job Keeper and other stimulus packages may do more.
It is highly likely that this low interest rate environment will last a few more years and bring increased opportunity for those who take advantage of it.
Now is a great time to look at the benefits of reducing your mortgage versus using the extra cash flow and/or home equity to fund further investments. Additionally, if the government is successful in its bid to relax lending laws to make it easier to borrow money as recently announced, this will add weight to the argument that you should use this opportunity to increase your wealth.
While I am all for reducing debt on your home loan as quickly as possible, there comes a time when it is more beneficial to use the equity in your home to invest for your future. All too often, people pay off their home loan before looking to invest, as they believe this creates more financial security. However, while this may be somewhat true, the mere fact of paying off your home loan before you invest severely restricts your ability to create wealth.
The opposing argument is to create more wealth in your life, as this gives you more security, especially when you consider that investing in good assets can also lead to paying off your home loan faster.
More importantly, building wealth earlier in life results in more assets in retirement, which has to be good.
Everyone should look at this low interest rate environment as a once in a lifetime opportunity to not only reduce housing debt but also invest for the future. Of course, if the government relaxes lending laws, the opportunity will get even bigger.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.