Why you shouldn’t pay off your mortgage
WHEN I was growing up, my parents would advise me of the need to get a good job, buy a home and pay it off as quickly as possible. I suspect this advice came from their parents as well.
At the time it was sound advice - paying off your home would provide you with the security you needed to live comfortably. Or so I thought!
When I was in my early twenties, I attended my first wealth creation seminar with over 1000 people in the room. You can imagine my shock when the presenter suggested to all in the room that paying off your mortgage WAS NOT the smartest way to achieve financial security.
But hang on a minute, generations of Aussies had been taught that this was "The Way". Owning your home was the great Australian dream, right?
Well as I discovered then and now know, this is not the case. The modern financial era has made investing for personal wealth creation a lot easier and a lot smarter …
THE MODERN WAY
Rising living expenses have put considerable strain on our household budgets, and we need to seek additional income streams to provide us with the financial security that paying off the family home does not.
Now before you start screaming at your screen, suggesting I have lost my marbles, it is important to understand that I am not advocating you don't pay your mortgage.
Let me explain.
When you buy your first home it is likely that you will need a deposit of between 5 per cent and 20 per cent, depending on your circumstances and your bank's requirements. For an initial period of time, the historical advice of mum and dad still holds. That is, pay down as much of the mortgage as possible.
What you are trying to achieve in this period is to create equity in your home. That is, the difference between the value of the home and the amount of the mortgage.
Once you have built up this equity value, this is when the old myth that paying off your mortgage will provide you security is turned on its head.
You see, that equity is just sitting there doing nothing. Sure it is great that it is increasing, but it isn't doing anything to help pay your living expenses.
To achieve real security, you need to be getting your money, and this equity, to work for you.
You use this equity to invest in properties, stocks or both to grow your wealth.
And this is where the real fun starts.
THE DOUBLE WHAMMY BENEFITS
Investing in good quality investment properties and stocks will provide you with two things.
First will be additional assets that will grow over time. Not only will you benefit from the growth in your home, but now you will have additional assets that will grow in value.
This is the power of compounding. Some say compounding is the secret of the super rich.
The second benefit is that these investments will also provide an income stream.
This income stream will initially pay the costs of holding the investment, but over time will provide you with an income to offset some of your living expenses.
Real financial security comes when you can pay all your living expenses from money you receive from your investments. That means, you no longer have to rely on exchanging your time for money to meet your living expenses. Imagine the security that would provide you.
Take a look at the last Rich List of Australia's wealthiest people and you will see that a large proportion of the list have made their money from investing in property. This isn't some secret scheme, it's what all the wealthy people are doing.
If you have held you family home for some time and haven't started investing for your financial future, then it might just be time you used that equity from the growth in the value of your home. Your financial security depends on it.
If you are just starting out on the homeowner merry-go-round, then the key for you is to pay down as much of the mortgage as you can afford in the short-term to build up the equity to a point that you can then get it working for you.
So the good news is that not only have I built my wealth by using the equity in my home, but so have my parents. We have thrown away the old money myth about paying off your mortgage and instead are using the equity in our homes to build financial security the modern way.
Andrew Woodward is a mindshift.money accredited money coach based in Sydney who teaches people to take control of their money and invest for their future, simply and efficiently. Sign up for his free weekly money tips at theinvestorsway.com.au.