There are two schools of thought when it comes to debt. One school says pay it off. The other says pay off bad debt (like credit cards) but leverage good debt (like home loans).
What you choose to do will come down to your wealth creation strategy and what you feel comfortable with.
Let me walk you through an example of how the two different approaches work.
Pay if off
If you had a 30 year home loan, paying off principal at an average of $10,000 per year. In ten years, with a little compounding, you will have paid off $120,000 to $150,000. You’re getting there, but it’s slow.
If you used the equity in your home as a deposit and bought an investment property for $500,000, which increased in value over 10 years to be worth $1,000,000. You’ve now made $500,000 in that period at a growth rate of 7%.
So by paying your home loan off, you’re $150,000 ahead, by leveraging it, you’re $500,000 ahead because you’ve used your money to service the investment loan rather than pay down your home loan.
Even if you just stuck with one investment property, you would be far ahead of the game and even though you still debt on your home. Factoring in inflation, your loan wouldn’t be as big a burden, and with the increase in value of your home, it’s a much smaller percentage of its value and your loan to value ratio would be much lower and more manageable.
You could always sell the investment to pay off your mortgage in full, but you’re losing the opportunity that comes from the asset. And property investment is a long term strategy.
Imagine if you didn’t stop at one property. The numbers compound beautifully.
Don’t be afraid of debt (except credit card debt – be very afraid of credit card debt!). Get used to it, explore your options, create a strategy and use it to your advantage.
If you want to discuss your wealth creation strategy, we’d love to help.