Quality investments trump early home loan payoff

“Mate, do you have an opinion on the orthodoxy that you should pay off your mortgage before pumping money into investment?”

Oh, Mr Editor! As a matter of fact … yeah, I do. Thank you.

For those who have a mortgage, but know that they need to invest, I have a strong opinion. And what I hope is a helpful little saying.

“Manage your mortgage, then manage your wealth.”

This means, in essence, that as soon as you’ve got your mortgage under control, start investing.

DO NOT wait until your mortgage is nearly paid off. Invest in quality assets, outside your home, as soon as you can. If you don’t, you risk missing 10 or 20 years of compound growth … and some income streams that might, actually, help you own your home sooner.

A home is the cornerstone of wealth creation. You will eventually own your own home. But, “if you decide not to buy, you will rent until you die”. Rent never ends.

Your home will never provide you with an income stream. As a result, on its own, it won’t allow you to retire early. Well, not early and wealthy, anyway.

However, as you grow equity in your home, it can be used to help you purchase other assets to help grow your non-home wealth.

Retiring early requires you to have assets, and income streams, outside your home, that provide a “passive” income stream. Income you don’t have to work for.

This is done by buying quality assets that, over time, will give you what Albert Einstein declared to be one of the most powerful forces in the world … compound growth.

What does having your mortgage “under control” mean? It means when it’s no longer causing acute pain. When you first take out a mortgage, it’s generally painful. It’s more than the rent you were paying.

But at some point, the pain subsides. Sometimes because of payrises. Other times because of reduced spending. Bonuses. Inheritances.

When the pain drops a little, you have choices.

You can spend more and reward yourself a little. You can increase loan repayments. Or you can start to invest, in assets, or via super.

Choose one. Choose a little in all three.

What do I reckon is best?

An example.

Some new clients came in last week. Signing up for their first mortgage. It wasn’t small – around three quarters of a million dollars.

They weren’t on huge incomes. Their combined salaries were about $150,000. This mortgage was going to be a stretch.

But while we were discussing exactly how much to borrow, they asked the following question.

“What if we want to keep some money aside to invest? In some other assets? Something better than the home mortgage. We don’t want to work until we’re 80,” they said, nodding at each other.

I was in awe. I love this attitude. Absolutely. Love. It.

It showed me a couple already thinking beyond owning their home, before they’d even got their first mortgage. A couple-unit already looking to how their home could help them create wealth.

This is a rarity. But beautiful, from a wealth creation perspective.

Why should you stretch yourself to purchase other assets, before you OWN your home?

Take two couples. One stretches themselves to buy an investment property after they’ve had their mortgage for, say, five years. The other couple waits until they have paid of their home. Let’s say they’ve done that after 15 years.

The first couple sacrificed and bought an investment property worth $500,000. For the first decade or so, it was negatively geared. At around the 10-year mark, it turned neutral, then positively geared.

But what happened to the capital value? If we say that it grew at 5 per cent compound, the investment property bought at the five year mark has now growth in value to $815,000.

A positively geared asset, with reasonable equity. Potentially, along the way, they used some equity to purchase other assets.

All of which required sacrifice. They had to make a decision to forgo spending of some savings or some excess income, to purchase investments.

In my humble opinion … the question as to whether to invest before you have paid off your mortgage is actually a no-brainer. The answer is yes.

The choice is actually about making sure you acquire quality assets.

Bruce Brammall is the author of Mortgages Made Easy and managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au.