Latest NewsIs Your Mortgage the Best Place to Park Extra Cash ?Friday, 19 August 2016

Property commentator Michael McNamara debates the pros and cons of not altering your payments when variable home loan rates change.

Australians, by default, are paying their loans off quite rapidly at the moment. Is this the best thing to do?

The situation arises because even though variable mortgage rates have come down to almost half what they were last year, mortgage repayments aren’t automatically adjusted by the lenders.

You have to request that the bank to alter your repayments in line with mortgage rate movements downwards. Most borrrowers don’t bother.

This, of course, means that millions of Australians are paying far more from their mortgages than they are required to. This has two effects. First, it blunts the ability of the Reserve Bank to use monetary policy as an economic stimulus but it also effectively means that borrowers are paying their mortgage off more quickly than they are obliged to.

More of our money is being used to pay down debt, than it used to invest elsewhere in the economy, perhaps at the detriment of borrowers and business. The proportion of Australians that are investing in shares has dipped to 41 per cent, down from 46 per cent a few years ago. In the face of a bleak economic winter Australians are becoming conservative and who could blame them really.

Borrowers often see the benefits of paying down debt as, firstly, that the interest payments foregone are tax free. In other words ‘investing in your debt’ is bit like receiving a fully franked 5.5 per cent dividend (if that’s the prevailing mortgage rate). Paying off the loan is also very safe, secure and conservative with no capital exposure, but it is hardly what you would call a stellar return.

Alternatively, many prudent investors are using the opportunity, of spare cash from reduced repayments, to invest in rental property, blue chip shares, managed share funds or listed property trusts to extract better returns. It’s not hard to beat 5.5 per cent after tax, surely. So, I for one really question whether the mortgage is the best place to park extra cash.

Some say why stop there and prefer not pay the principal at all. This IS going too far in my opinion. The accepted wisdom is that a portfolio of balanced risk is the best way to invest. Being neither highly geared, nor overly conservative seems to be the order of the day.

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