Author Topic: Interest rates dropped (Aus) now I need some advice  (Read 3873 times)

Clarion

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Interest rates dropped (Aus) now I need some advice
« on: February 17, 2015, 08:49:26 PM »
The good news is the interest rates here in Australia have recently dropped.  Our mortgage rate is now at 4.63%.

We have been pouring every cent we can into our mortgage to try and get rid of that debt as soon as we can but now that the interest rates have dropped again I'm not sure if we would be better off investing in something like a managed fund.  Or, splitting the difference and still paying extra into the mortgage but also investing into some type of fund.  I'm inexperienced with share investing and would love some of your thoughts.  I have read some threads on the topic.  Is boggleheads relevant in Australia?  Is vanguard used widely in Aus? 
Our mortgage balance is at $242 000.  Actually it is really $272 000 but $30 000 sits in an offset account and I count that as being paid off the mortgage, it sits there in case of a major catastrophe or job loss or something equally horrible.  We have never had to dip into it yet, touch wood.

MagicDual

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Re: Interest rates dropped (Aus) now I need some advice
« Reply #1 on: February 17, 2015, 09:04:04 PM »
I hope you enjoy the time you spend here, and find the learning resources useful!

frozzie

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Re: Interest rates dropped (Aus) now I need some advice
« Reply #2 on: February 17, 2015, 09:48:56 PM »
Hi Clarion,

4.63% is pretty good ! I'm about to switch away from one of the Big4 to get about the same instead of the just-under-5 treatment.
Not much of an advice from me as we're pretty much in a similar situation (273k loan, 123k in offset) but i'll share some of our reasoning and you or other mustachians can comment on :
- putting everything in the offset account as a way to reduce the monthly repayment while keeping it accessible
- switched to interest only to reduce monthly repayment. The difference can stay in the offset or be reallocated
- started to use Vanguard funds. Decided to take funds instead of ETF because it forced me to pre-commit $5k and it gets a bit cheaper than ETF if you buy into the funds monthly (this might be wrong if you can get very cheap brokerage, i'm not really good at looking at those)

Eventually I'll start repaying the mortgage in one or multiple lump sums coming from the offset.

Considering how low the rates are and guesstimating that they will probably stay low for a good year or two, I took the bet to start investing more.
Or more appropriately diversifying investments as you could argue that putting 100% in mortgage repayments is like investing 100% in property (in this case yours).
Should the rates start creeping up again, I might split the loan to fix part of it and/or focus on repaying more aggressively.

The Vanguard funds give me the piece of mind as a rookie investor that in the long run (10 years or more) my regular investment will automatically buy more units when the market goes down and less when it goes up, while not having to care about individual companies.
Funnily enough it's the employee share program at work that got me thinking in investing in index funds ...

Ultimately it depends what your goal is. If repaying the mortgage and being debt free is important for you then put everything in it. In my case, I want the mortgage repayed shortly but still invest elsewhere to have something else to show than just a home ...

Hope it makes sense :)

marty998

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Re: Interest rates dropped (Aus) now I need some advice
« Reply #3 on: February 17, 2015, 10:25:25 PM »
I have a loan of $250k, but have over $210k in offset, so a net of just under $40k. Debating myself whether to take it easy now after effectively killing the beast. On track to pay it off in October but wondering if I should stretch it a year and split my usual repayments into investments instead.

With $242k still to go for you, this is an easy call. Mortgage all the way. It's a big debt, one you really don't want hanging over your head forever.

4.63% is a pretty good rate. Which bank are you with?

I suppose also it depends on your income and other expenses. If you can give us a full picture, we'd be able to help in more ways than one.

deborah

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Clarion

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Re: Interest rates dropped (Aus) now I need some advice
« Reply #5 on: February 17, 2015, 10:50:46 PM »
Thanks for your replies!

Frozzie, your info was very helpful and had me back on the vanguard website for the past hour!  Have been seriously thinking about Vanguard but the emotional joy of paying off the mortgage and then leaping into vanguard is also pretty attractive to me.

Marty,  I always love reading your posts.  You are clear and make good sense to me.  I hate having the mortgage hanging over my head.  Would love to have it gone ASAP.  We are with ANZ.
I have posted a case study a while back....
http://forum.mrmoneymustache.com/ask-a-mustachian/reader-case-study-advice-appreciated-for-my-first-world-problems/msg306996/#msg306996

I also have a journal but have to admit I have been slack with updating it.  Since posting the case study we have had our heads down just paying as much as we can into the mortgage.  No holidays, have cut back on going out to eat and we also pulled the kids out of private schools. We still lead a comfortable life but a more simple one.  It has been my mission to pay off our debt so we can then start investing in other ways. 

marty998

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Re: Interest rates dropped (Aus) now I need some advice
« Reply #6 on: February 17, 2015, 11:13:54 PM »
My bad. I forget sometimes lol. But thanks for the kind words!

Have a sneaky suspicion your house may have appreciated by $250k over the past year. Sydney property boom and all (you are in Sydney right?)

Out of the box idea but if you are not emotionally attached to it one thought would be to put the house to auction, get a Chinese buyer to pay well over the odds, eat the stamp duty on a new place for say $1.5 million and you come out of it mortgage free with several hundred thousand to spare for investment purposes.

Move to a more reasonably priced area for $1 million (lol) and hey life is suddenly easy.

marty998

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Re: Interest rates dropped (Aus) now I need some advice
« Reply #7 on: February 17, 2015, 11:21:16 PM »
dammit, wrong again, you're in Perth lol.

but the idea still stands, though I'm not as aware about the gyrations of the Perth housing market as I am about Sydney...

Clarion

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Re: Interest rates dropped (Aus) now I need some advice
« Reply #8 on: February 17, 2015, 11:26:22 PM »

Have a sneaky suspicion your house may have appreciated by $250k over the past year. Sydney property boom and all (you are in Sydney right?)

Out of the box idea but if you are not emotionally attached to it one thought would be to put the house to auction, get a Chinese buyer to pay well over the odds, eat the stamp duty on a new place for say $1.5 million and you come out of it mortgage free with several hundred thousand to spare for investment purposes.

Move to a more reasonably priced area for $1 million (lol) and hey life is suddenly easy.

I am in Perth so unfortunately my house would have probably not appreciated at all, if any, over the past year. 
Have thought many times about selling it and buying something cheaper.  Not overly attached to the house as such but we are overly attached to our location.

MsRichLife

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Re: Interest rates dropped (Aus) now I need some advice
« Reply #9 on: February 18, 2015, 01:01:50 AM »
If the mortgage is on your own home, my personal opinion is to 'pay down' that mortgage debt via putting excess funds in the offset account. I once made the mistake of paying off my mortgage and couldn't convert a PPOR to a rental property in a tax effective way.

When you've built up a decent buffer and decide you want to invest the funds, get the bank to split the loan so you have a smaller loan against the 'personal' portion and get a new 'investment' loan which you can redraw against. 

Wildflame

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Re: Interest rates dropped (Aus) now I need some advice
« Reply #10 on: February 18, 2015, 02:05:49 AM »
The math is not too tricky. The money you use to pay down your loan means you incur less interest. That means you are getting a 4.63% return on your money. However, this benefit is post-tax; you do not pay any additional tax on the money you save. If you were to put your money in investments instead of your loan, you would need to pay tax on the returns from that investment.

Assuming the yield from your investment is paid out each year (term deposits etc), the return % at which you would be indifferent between paying down debt and buying investments is 4.63% / (1 - your marginal tax rate %). So if you're earning $50k a year and thus in the 34% bracket (including medicare levy), you would need to earn 4.63% / 0.66 = 7.02% on your investment or better in order for investing to be a better option than paying down debt.

It gets a bit trickier if your investment is held over time in the form of capital gains (real estate investment trust, shares that don't pay dividends, etc). For these I'll assume you hold the investment for at least a year, so benefit from the CGT concession, halving the marginal tax rate that applies. Therefore, for these investments you would need to get a return of at least 4.63% / 0.83 = 5.58% or better in order for your investment to be a better choice.

This math assumes two extremes: 100% capital gain or 0% capital gain, and does not address the riskiness of investing. In short, equities and bonds will get you better returns on average than you would get from paying down your mortgage; that said, you're also taking on the risk your investment may lose value, and added complexity in managing your investments and tax affairs.

My personal opinion is that outright ownership of a property yields such gigantic peace of mind that anyone who is not a knowledgeable and risk-seeking investor should pay off their mortgage first.

EDIT: An offset account is a brilliant idea.

I have a Vanguard account but I am saving towards a deposit and have no commercial debt, just HECS. Once I can afford to buy I will focus on paying off my mortgage first.
« Last Edit: February 18, 2015, 02:08:16 AM by Wildflame »

agent_clone

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Re: Interest rates dropped (Aus) now I need some advice
« Reply #11 on: February 18, 2015, 02:14:50 AM »
I'm not sure if this will help, but what I'm personally planning on doing is getting my mortgage to be paying interest on about $200k (I'm a while off that unfortunately) then seeing where there interest rates are at.  I will perhaps end up investing 50/50 with mortgage offset and shares in some form.  Saving 10k, and then investing 5k of that 10k.

Why 200k you ask? Because that is the point at which I feel I will still be comfortable if interest rates go up to 10% (Although I don't see that happening anytime soon).  It is also the point at which if I were to put the money directly onto the mortgage and then reduce my payments at the current interest rates it would be close to that of the last share house I lived in per week.

Who knows when I reach that 200k mark I could easily just choose the less risky mortgage offset route!