OK …. so say you own a PPOR with say $400,000 owing on the mortgage. Your repayments are say circa $600 a week. If you doubled your payments, obviously you would pay the loan off quicker and reduce the amount of interest paid…..
My question ….. Is there a point at which (or a dollar value) the amount you pay off becomes redundant whereby you would stand to earn better returns using the excess money for further investment?
I recall seeing an article that stated $12 per $1000 of debt is the maximum one should pay. I dont know if this is completely accurate but is there a formula or figure for this ??
Thanks
Ryan
Be Alert – The world needs more lerts
Hi Ryan,
Interesting question.
I like to keep my home as debt-free as possible on the basis that if all my property investing turns pear-shaped, at least my home is debt-free (and in my wife’s name).
However, as a concept, you will be be ahead if the after-tax return achieved from your investing exceeds the interest payable on the portion of your home loan you have refinanced to invest in the first place.
Note: you should use after-tax, not pre-tax, returns.
Cheers,
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
This sort of falls into the old cliche of "a dollar saved is a dollar earned" and a concept my economics teacher in year 11 (a hundred years ago) called an "opportunity cost".
If your PPoR is never used for investment purposes then the interest you pay on the loan is money down the drain – a bit like rent I suppose. The more you can pay off your loan above the minimum repayment, the quicker you pay off the loan and the more interest you save. In this sense, there is no cut-off point for paying too much off the loan in my opinion.
Say, for example, you can pay double your repayments, you may cut your 25 year loan down to less than half, and maybe save $100k in interest. As per the cliche; it is money earned.
As my eco teacher would try to explain; the alternative to paying down the loan quicker is to pay the minimum repayments, and put the difference in the repayments into another investment vehicle (say; shares).
Say you make $80k in after-tax profit on your shares over the time you would have paid off the loan had you put all your spare cash into it and saved $100k. The "opportunity cost' of the shares option is $20k. It has cost you $20k by going with shares rather than paying down your loan.
This is a very simplistic example, but I hope you can follow my meaning. In the long run, you will do well either way as to pay down your loans quicker increases your equity and enables you to reinvest sooner, thus exposing you to more cap growth and so on.
Only pay $12 per $1000 of debt!!!!
That is only 1.2% of your debt… wouldn't that be stretching things to pay off the interest?
I guess it would depend whether you are paying off $12 a week, month, year, etc…
Sounds a bit of a dangerous concept to me.
Kelly
I know that Noel Whitaker seems to always advise paying $12 per $1,000 per month, but no more as this is the optimum repayment and will repay your loan in about ten years.
Wylie
Wylie wrote:I know that Noel Whitaker seems to always advise paying $12 per $1,000 per month, but no more as this is the optimum repayment and will repay your loan in about ten years.Wylie
that's not a bad criteria; at 1.2% per $1,000 per month that is 14.4% per year. Unless interest rates climb to that level, you are doing well.
Why does he not advocate paying anymore than this?I think this might be the next question for me too – what is the rationale behind Noel's seemingly arbitrary cut off point ??
I mean what happens if you pay more – is it some sort of diminishing return ???
I am intrigued.
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