Do you want to know a secret?

Generations of Australians were taught to get a good job, buy a home and pay off their mortgage because they were told they’d be looked after in retirement by the government.

Now that was supposed to mean the pension would be there for them in their twilight years.

And it still is… but it’s not enough.

Sure, millions of baby boomers have diligently paid off their mortgage, but in retirement, they struggle to make ends meet.

Their superannuation balance is too low, and – let’s face it – the pension is paltry.

So the question is: Should you pay off your mortgage or invest first?

First, a bit of Finance 101

Here’s the thing: financial literacy is a relatively new concept.

I certainly wasn’t taught it at school or by my parents, which meant I made my fair share of mistakes at the start of my investment journey.

But nowadays there is a better understanding of wealth creation principles, which more and more Australians are adopting before it’s too late.

One of those principles is recognising the difference between good and bad debt.

As I’ve said before, good debt is something that helps us grow wealth, such as via a mortgage.

While bad debt is what we accumulate when we spend money we don’t have on our credit cards.

In the past, homeowners thought that their mortgage was bad debt that needed to be done away with as soon as possible.

But they were wrong.

And many are now paying the price because owning one property simply won’t fund a decent retirement.

Wealth generation

Now paying down the mortgage on your home is still a sound idea.

But you can actually use the increased equity position grow your wealth more quickly.

As long as you can access any additional payments you have made on your mortgage, you can use that money to fund new investment property purchases.

The problem is that you are at the mercy of your bank to access your own money!

Who wants to be in that position?

Not me!

My preference is to put your savings or surplus funds into an offset account rather than paying down your mortgage.

That way, when you have sufficient funds, you can easily withdraw it to help finance your next investment-grade property.

Another bonus with this method is that while that money is accumulating in an offset account, it is reducing the interest component on your home loan – which is saving you even more money!

Money matters

Let’s consider an example, shall we?

John and Sarah are in their early 40s and own a property valued at $850,000, which has a loan balance of $600,000.

They haven’t made any additional principal payments on the home loan since they bought it a few years ago but it has increased in value.

Instead, they’ve been depositing surplus funds into an offset account, which now has about $90,000 in it.

Following expert advice on how they can improve their wealth position before retirement, they decide to buy a $450,000 investment property.

That property will require a deposit of $90,000 on an 80/20 loan to value ratio, which will ensure they avoid lenders mortgage insurance.

The couple can easily withdraw the funds from their offset account for the deposit and can even use some of the equity in their home to finance additional costs such as stamp duty.

Here’s the trick….

Our lending landscape is changing rapidly at the moment.

That means that lenders are often moving the financial goalposts.

One day you may be able to access all of your increased equity, but the next it is much more difficult – and there’s very little you can do about it.

No one wants to be in a position where their investment plans are hamstrung because of forces outside of their control.

Rather, it’s always advisable to have access to your own funds to assist you in growing your financial position through prudent property investment purchases.

And that means investing first rather paying off your mortgage – every single time.

Michael Yardney
About Michael Yardney
Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He's been voted Australia's leading property investment adviser and his opinions are regularly featured in the media.
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