If you have $200k+ left in your mortgage and enough fund to pay it all off, would you…
Sorry for the noob question, appreciate all the advice :-)
Why buy a future Taxi, when you can buy a BMW :)
I think he may mean Tesla stonks.
Telstra *
You mean a current (German) taxi instead?
Your comment was probably taken the wrong way.
Have BMWs and Tesla, would take the steering feel of the BMW anyday.
Option 6 will depend on your age and what you’ve achieved on a personal level.
I'd go option 2 until you feel comfortable with the amount you have in emergency fund if you pay down the mortgage (so if you feel safe with $100k in emergency fund, wait until you have $100k left on the mortgage), then pay off the mortgage, keep emergency fund in a high interest account, maybe use any extra you saved in the interim to renovate newly unmortgaged house.
I’d use it for surgery to get helicopters for hands. Think of the benefits
It would be difficult, but worth it.
Feasible.
I'm doing number 2 right now. I've redirected my mortgage payment to a HISA and when that gets to a reasonable amount, in about a year, then I will probably pay off my mortgage in full.
I'm doing number 2 right now.
Me too.
You always do number 2 in the morning while browsing OzBargain ?
you know… its the vibe man
I realised what I wrote straight away but didn't even want to change it haha
best ideas from the throne of contemplation
Better off leaving the cash in the offset, getting another loan for 200k against you house and investing that in shares etc. Interest payments are tax deductible and capital gains will be reduced if the asset is held for more than 12 months. A HISA unless returning more than CPI after tax is money going backwards.
This. Also, consider maxing out your super before tax / concessional contributions if you haven't already and confirm the total of any catch-up contributions from past years you can use via myGov and then make a decision on putting a portion of your HISA cash towards catching up fully.. you won't thank yourself now but hopefully you will in the future..
Yep this one which is what I did
I know there's probably a better way to earn more money but I'm not willing to risk my house to do it.
Everyone has a certain risk profile I guess.
The above is saying to use a portion of the equity, not the whole value of the house, to invest in income generating shares thus making the interest deductible.
From my reading, to do this OP should organise with his bank to split the loan amount into specific accounts that serve a single purpose so that the entire account is used only for that specific purpose (shares, new investment property etc).. and then transact only using clean bank accounts if he can't transfer direct from that new loan account. Otherwise it's a lot more work in accounting and potentially the traceability of funds gets lost it he mixes borrowed funds with personal funds..
Ie: speak to an advisor and do your own reading on ATO tax rulings because ultimately we are responsible not those who advise us..
@inertia8: It’s called debt recycling. Plenty of info if you Google that. Need a good tax advisor and broker/banker.
@vetopower: Indeed, I'm aware, plenty of great info on property chat too. One of the best tidbits I gleaned was surrounding traceability of funds as well as the fact that no matter how good the advice you are ultimately responsible for knowing if it's legitimate and can't just blindly follow.. plenty would blame advisors/accountants etc if they come unstuck
to invest in income generating shares
Just to be clear, I also do invest in ETFs currently and will continue to do so, just putting some of my regular savings into a HISA to reduce the risk a bit until I get my emergency fund saved.
By my calculations, assuming an average 7% on ETFs and 5% on HISA p.a. I should have $1m in 10 years time (when I'll be early 50's) as well as a paid off house plus whatever is in my super. It might be more, it might be less.
I’d pay to go into a submarine and look at the titanic
I find your comments crushing.
A more in-depth reply would be good.
don't hold your breath
We all are imploded by the comment
I've subbed to this thread now
You will regret in 20 milliseconds.
Another option. How much pressure is this going to put him under!
How sad for Australia to give in to USA media like sheep
Edit but I’m all for making fun of the rich
I'll sure you're a good person, deep down.
You will get good value maxing out your concessional contributions in your super (assuming you pay tax and are eligible).
1 and 5. What is your age, will determine if putting in super is worthwhile. Likewise what is your tax bracket? Legislation is kicking in, in July which will benefit high income tax earners.
Why would you choose the high interest savings account (5.)?
I would assume the interest rate on the loan currently is about 5.5%, so you would need the HISA to be well above this to get equivalent after tax income.
Looking at the income tax brackets:
$0-$18,200 taxed at 0%, so a HISA of 5.5% would be equivalent.
$18,201-$45,000 taxed at 19%, so a HISA of 6.79% would be equivalent
$45,001-$120,000 taxed at 32.5%, so a HISA of 8.15% would be equivalent
$120,001-$180,000 taxed at 37%, so a HISA of 8.73% would be equivalent
$180,001+ taxed at 45%, so a HISA of 10% would be equivalent.
These also don't take into account the 2% medicare levy.
If you're referring to stage 3 tax cuts, they are for 2024/25 FY (not next FY)
Don't hold your breath. Still one more year to go so plenty of time for it to be abolished (unfortunately) under the new government.
Both major parties supported it. It won’t get canceled, unfortunately.
Never say never
7% inflation (as your cost of living gone up by ONLY 7%? Mine hasn't)
Some meagre wage growth for the lucky ones
And we don't have tax income thresholds adjusted any time soon. Ridiculous!
Meanwhile, the government is still printing and borrowing away, further reducing the value of our wages and savings
Not sure where you get your data from, but your last sentence is not correct "Meanwhile, the government is still printing and borrowing away".
The RBA has been reducing the amount of both physical and digital forms of central bank money of late.
Currently the amount of notes on issue (physical cash) is $101.466B, down from $103.995B at 28/12/2022.
Currently the amount of exchange settlement balances (digital money) is $394.024B, down from $473.090B at 15/2/2023.
https://www.rba.gov.au/statistics/balance-sheet/
The amount of debt issued by the government has been relatively stable over the last year.
Looking at Australian Government Securities (AGS), the face value currently on issue is $887.8B, compared with $892.747B at 30/6/2022.
https://www.aofm.gov.au/
https://www.aofm.gov.au/data-hub
Australian government net debt has also been relatively stable over the last couple of years.
https://tradingeconomics.com/australia/government-debt
Looking at the different measures of money supply also show what is happening:
M0 money supply is around $546B and has been relatively stable over the last year.
https://tradingeconomics.com/australia/money-supply-m0
M1 money supply is around $1,631B and has been gradually decreasing over the last year.
https://tradingeconomics.com/australia/money-supply-m1
M3 money supply is around $2,877B and has been rising over the last year (and over the last 25 years).
https://tradingeconomics.com/australia/money-supply-m3
Majority of money is created by commercial banks (CBA, NAB, ANZ, etc…), whenever someone decides to go and take out a loan.
https://www.rba.gov.au/publications/bulletin/2018/sep/money-…
Central bank money as a percentage of total (M3) money supply is only 17% ($495B/$2,877B).
When the government needs money, it issues AGS, so no new money is created. Investors / Institutions use their savings (already created money) to purchase this debt, so it is essentially just money swapping hands.
@Malik Nasser: Brother, did you look at your own links? Money supply has steadily increased, and absolutely exploded in 2020. We are far from the 2019 baseline, let alone getting to 0 (or other equilibrium). Set the graph to 10 years, or 25.
This is Rome clipping its coins type of BS
Not sure how you think raising fractional reserve banking by 'private' banks alleviates my complaints against money printing, either.
@gfjh567gh3: I think our difference of opinion is based on your use of "government is 'STILL' printing ". When you say 'still', I take it to mean, right now, or at lest over the last few months.
Yes clearly the RBA has created a lot of central bank reserves (exchange settlement balances) over the covid period.
The creation of these exchange settlement balances (money printing) was done to control interest rates (the yield curve), due to uncertainty because of covid impacts. Clearly the RBA had to do something, they just kept it going for longer than was required (benefit of hindsight).
Both the bond purchase program (BPP) and the term funding facility (TFF) added liquidity to the system. The TFF is what the media is talking about when they mention the 'mortgage cliff'.
The below gives an overview of the RBA's tools used and amount of liquidity added over the covid period:
https://youtu.be/Lil6EESRQEk?t=1950
There is no baseline when it comes to the money supply (M3 anyway). With a fiat currency, it pretty much always goes up over time.
If you are referring to the ES balances baseline, it has had a few 'baseline' periods.
On 6/11/2013 the ES Balances were $984M.
By 20/11/2013 this had increased to $22,322M, and stayed in this $22B-$25B range till 25/1/2017.
By 1/2/2017 it increased to $28,322M and stayed in this $28B-$30B till 26/2/2020.
Then we had covid and it really took off, finally peaking on 15/2/2023 at $473,090M. It is now on the way back down (currently $394,024M).
I don't really understand your last sentence regarding private bank money creation.
I am not a fan of the term 'fractional reserve banking' especially in Australia where the 'reserve requirement' is 0%.
https://en.wikipedia.org/wiki/Reserve_requirement#Countries_…
There are capital and liquidity requirements, but not reserve requirements.
Anyway, money created by private banks has the same effect on the money supply as money created by the RBA. It all increases the amount of money in the system, and hence devalues the existing money.
Considering private banks have created, and continue to create the majority of money in the system, they clearly have a larger impact on devaluing existing money. But private banks can only create money at the request of borrowers (and only if it is profitable for the bank to do so, and within the banks risk management framework).
With the RBA raising interest rates, less people are able to take on new loans, and the size of the loans is likely to be smaller. This should help in restricting the money supply.
The RBA is unlikely to be 'money printing' (creating ES balances) any time soon, unless we have another disaster which requires their intervention.
No. 2
It depends. With the info that we have from the OP, I'd go option 2 and clear debt, keep it as an emergency fund.
Option 1.
All depends,
What's the interest rate on your mortgage vs interest rate of the high interest saving account?
Investing always comes with risks, but the market it still recovering and could result in yields much higher than 5-6% this year, of course comes with a risk.
As we're in a weird situation these days with inflation and interest rates, I'm more risk adverse, so would be leaning towards #2.
Who needs a 200k emergency fund?
Medicare is going to sort you out 99% of the time. Not like you live in America or something.
emergency lambo obviously..
Half a lambo?
5 Camrys
Medicare is going to sort you out 99% of the time. Not like you live in America or something.
Only until you realise that Medicare doesn't sort you out for many things (even when they are covered) when you need them done in a reasonable timeframe. Wait times are crazy even for procedures and surgeries that one would want done in a couple of months time. Unless you have a private insurance covering the need, you are at the mercy of that emergency fund you are referring to. I wish no one has to go through such an emergency though.
All are workable options - it really just depends on your personal circumstance and/or financial goals. I don't think you'd go wrong with any of the options provided you enact them at the time/timing that suits you.
I've done all options 1 to 5 at different times. As example, I currently have no. 2 (but against investment properties). Completed no. 1 about 10 years ago, capitalised on no. 3 and 4 during the height of the pandemic when share markets and super unit prices are low. Now using No. 5 given the rate increases.
Pay off Mortgage
30 percent etf
10 percent meme
30 hisa
40 offseg
And $200 on maths lessons
love it
I'm in the same boat. I've switched to prime pumping my super. But I am in my 40s and can just make out the hazy outline of the finish line some way off in the distance…
A few comments here about OP's age, and rightly so. Surely that is a main driver for which option is best for OP.
Get the apple glasses next year and save enough money to keep upgrading for the rest of your life. You'll want matching iPhone too.
1.) Pay off the mortgage and clear the debt — serves no purpose other than physiological, in fact is tax ineffective if move.
2.) Leave the money sitting in the offset account (as emergency fund) and pay no interest on the home loan — best option, cheapest loan will be off yourself if need be, can move to another ppor if you move etc. just ban yourself from touching this money as much as possible.
3.) Use the extra fund to invest in something else (which is?) — no, be pretty hard to beat your home loan rate plus the taxes on top. ~9%. may have growth
if anything borrow the money to do this so it is tax deductable (I think)… but if you wanna invest in shares do some of 4
4.) Top up your super with the extra fund — if you can, do some, leaving yourself enough in 2
5.) Put the cash in a high interest saving account — pointless when have a mortgage, and offset < mortgage
6.) Do something else with the fund? - no
options 2 and 4. id probably for the current environment just do option 2 to the point you are comfortable, then some of option 4.
option 4 depends on wage and age too, current super balance (are u tipping over 500k) . are you in high tax bracket? are you nearly 60?
Not financial advice.
You thought about debt recycling.
On super.
1. Only worthwhile if you are on high income brackets (37%+)
2. If home loan is not tax deductible and you are paying after tax dollars at 6% you probably need 9% return (pre tax) to make alternative worthwhile
3. If you are on 37% tax rate and super is 15% tax on contributions work out if it is worthwhile to lock up your money for years (and if you need the money)
Alternative
If your partner is not working or on very low tax rate 19% you might want to shift your after tax dollars to them and invest in their name. For example franking credits on shares they will get back 100% if they are under tax free threshold.
Just food for thought.
I agree with this. Put nest egg of 50k in offset. Given they are 50 I would max the current and previous years concessible super contribution for tax concession. The rest I would put on the loan, and then redraw into some safe ETFS so the remaining interest is tax deductible. I would avoid the HISA, their offset account would be better than any HISA.
Thank you all!
Appreciate all the advice.. there's some real gems in here.
Age is close to 50, still working on 32.5% income tax bracket.
Looks like number 2 is the favourite for most :-D
Is the loan a PPOR or investment loan? There may be benefits for a investment loan purposes of paying interest if those funds are in other investments
Pay off the mortgage and clear the debt
Dont put all your eggs in one basket. 50% in offset, 25% invest, 10% Super,15% HISA.
HISA is redundant over simply having the funds in the offset. The interest rate on the HISA would need to be 45% higher than the interest rate on their loan to make it worth doing.
I'd pay off the mortgage just because I hate being in debt.
I agree same i would do that too.
In a high inflation environment where interest rates are less than CPI being in debt is a better financial decision, as odd as it sounds. The real value of your debt/savings is decreasing rapidly
That only works if real wages catch up. Which they haven’t for past 10 years due to various factors (weak unions, high immigration etc.)
@duchy: We are entering stagflation, a worst case scenario for the economy. Since we started in an environment of low wage growth, (and none of the factors that caused low wage growth have been removed, so it will continue) this is the most likely scenario IMO.
The textbook relationships and experience of the 1970s don't apply.
The RBA should have forseen this. Instead, because they are a panel of corporate hacks who landed in their position through connections and corruption, they instead declared that unemployment during COVID needed the typical response of lower interest rates - a response expecting that businesses need encouragement to take on more debt, expand, and then will hire more people and lower unemployment. The result is this broken economy.
Unemployment was caused by lockdowns, they added inflationary pressure when the economy was supply side constrained rather lacking demand.
In our current economy the premise still holds because the price of all goods is increasing, including housing and other real assets.
I assume the mortgage is on your own home & not an investment property? If so you can't claim a tax deduction for the interest so the best & safest option for your $200K is to discharge the mortgage.
Wouldn't leaving it in redraw/offset be better option? You wouldn't be paying any interest at all, and then you can still access the funds in case of an emergency etc.
If you discharge the loan you wouldn't have the money for emergency uses, and also wouldn't have any money left over to invest/put in a savings account.
As you can tell I am most definitely not an accountant but it just depends how much of a risk appetite OP has, and i'm basing this off them having exactly 200k to spend
The only reasons I can think of to ever go 1 over 2 would be
- annual fees, paying it off could save years of fees
- lack of self control, but OP has 200k in there so not a problem for them
Third reason: if the bank went under, your offset account may simply disappear, and you'd be reliant on the $250k gov guarantee to pay out (probably would, but never tested…). With bail-ins purportedly legal in aus, discharging a mortgage reduces risk.
not sure but if OP ever moved out of home and converted it into a rental property I'm thinking the loan interest may then become tax deductible to reduce tax on rental income
not sure because tax deductibility typically is something about 'purpose of borrowings' - I suspect it could work
I suspect it would be much harder to reborrow against an existing home once converted to investment property
Option 2. How many investments will deliver you a guaranteed 6%pa after tax? Very few. Park cash in the mortgage.
Personally I would do option 2 for you as you're in your late 40s and still working. You never know when you need some emergency money but personally I would go option 1 cause I am in my 30s and hate debt.
This is your PPOR so you can't negatively gear?
Option 2 - without a doubt
hookers & blow
If you like living dangerously, put the money in Bitcoin (it is going up at the moment, currently $46,300 AUD per coin). 3 months later and your money may have doubled in value. Or it could have halved. Crytocurrrencies have the potential for huge gains but also significant losses in the short term.
Otherwise, I would pay off the mortgage. Housing is king in Australia.
pay house off leave in offset account save up again once you get to 100,000 plus then just pay out.
I have never done this but just a thought as i am reading this thread.
Potentially better than no 2
7. Refinance to those who currently offer ~4k refinance cashback. It doesnt matter what is the interest rate that they offer whether it is higher or lower (Assuming similar ongoing fees to have offset account with the new lender).
Keep your 200k in the offset account so you dont pay any interest. Quick $$$ minus the refinance fees. Dont do it more than once a year as it may hurt your credit rating.
This is really option 2a. It's a good idea if you have time to keep doing it
Cashback refinancing offers are all but ending (ended).
Check out the Barefoot Investor book/audio book.
He talks about the right order to do it in. He recommends increasing super to 15%, then focussing on paying off the mortgage as quickly as possible.
Option 1 to have a good night sleep.
What are these HSIA that higher then a variable mortgage right now?
I am surprised how few people recommend no. 4. If the extra funds are purely for retirement investment it's easily the best option.
Pay off mortgage
Emergency fund for 3 months' worth, then high interest savings. Offset depending on how much you're paying in interest vs the savings account. I'm on fixed interest until next year so I'm in high interest savings.
If you are in the highest tax bracket looking at topping up concessional super may be a good idea.
Check ATO for available catch up contributions.
Still can be a good idea in other tax brackets, just not as good
Buy Tesla