Should you pay off your mortgage or buy an investment property?

We hear this question a lot from people who have made inroads into their mortgage loan and are starting to think about wealth creation.
There will come a time when your home loan will be more manageable than it was when you first got it all those years ago. You will also start to realise that paying the loan off is a distinct possibility. Imagine how excited you’ll feel when you find out just how much your home is worth and the gap between the home loan debt and the house value is growing all the time. Borrowing all that money wasn’t so bad after all. At that moment, as you ponder a much brighter future, it’s natural to ask a simple but important question.

Should you pay off your mortgage or buy an investment property?

Well, the answer is not as cut and dried as you might think, everyone has different ideas on the subject and there are many variables to consider. However, in most cases, two words usually sum up the main issues confronting you.

Security and Equity.
Let’s take a look at each of these in turn. First of all, most people want to pay off their home loan so they can feel emotionally secure, in the sense that they have a place to raise their family and safe in the knowledge that nobody can take it away. This is a powerful driving force for a lot of people and once it’s been achieved moving on to the next step of your financial journey can prove difficult. You see, if you want to improve your financial position you will have to invest eventually and without doubt equity is the key to investing.

The family home is an important asset because it has monetary value and that monetary value means you have equity.
Equity means you can invest in other assets to create wealth. However, unless you have large cash reserves, you will need to borrow to access the equity in order to invest. Obviously, doing so would burden the family home with further debt.

So, the first thing you need to be clear on is whether keeping the family home debt free is more important than creating long term wealth. How you feel about that will give you the answer to the investment part of the question.

Keeping the family home mortgage debt free might be a non-negotiable for you and there’s nothing wrong with that. The consequence is that investing will have to wait. So rather than invest, as a priority, devise a sound strategy to repay the home loan faster. Once the debt is repaid on your home you can switch the money being used for repayments to investing.

Leveraging the family home for equity could also be done before the home loan is repaid. Owning an asset that grows in value is just one part of creating wealth but leveraging allows the purchase of multiple assets leading to increased long-term wealth creation.

Therefore, leveraging the equity from the family home to purchase a well-positioned investment property makes sense from a wealth creation point of view. Of course, any decision to borrow to invest should be part of a financial plan.

Understanding the risks associated with investment property is important and in the end the decision to pay off your mortgage or buy an investment property comes down to a simple realisation.

With a little help, you could do both.

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