Offset or invest? Using your funds wisely for the future
Written by financial expert Rachel Smith for Choosi. The below information is to be used as a guide only and does not constitute financial advice. Please do your own research and consult a professional for any financial matters.
Mortgage rates are at an all-time low right now, so if you have a home loan you may have found yourself saving a little extra due to lower mortgage repayments – or you may have some spare cash you’re keen to invest.
But where can you allocate your funds in order to set yourself up for a better financial future? Put the money into your offset account? Pay down your mortgage? Or invest in other assets?
These are all great questions and there are pros and cons to every decision. Let’s look at what some of the available options are. The below ideas are thought starters only and don’t take your personal situation into account. Do your own research and get professional advice, and check out the various resources and articles linked to here for more comprehensive information.
The pros and cons of offsetting
If you have a variable home loan, you may have an offset facility – usually a transaction or everyday banking account that’s linked to your mortgage. Putting money into your offset account ‘offsets’ the balance of your loan, reducing the amount of interest you pay each month. Here’s how it works: if you had a $500,000 loan and $50,000 in an offset account, you’d only pay interest on $450,000. Which can save you thousands in interest – and years off your loan.
And keeping money in an offset account may be a financially safe option if your income isn’t secure, or if you like to have cash you can access for unexpected bills or expenses. The savings you’re making in interest can eventually add up, giving you a return in the form of reduced repayments or duration. And you may eventually even use some or all of the money in your offset account to pay your mortgage off sooner.
The downsides? You may not be diversifying your investments, and instead concentrating your wealth on the one asset only – your home, plus, there’s a risk of property depreciation. Also are there any account-keeping fees for the offset account and will they negate any of the financial benefits? A fixed rate may also have a lower interest rate than the variable rate loan. Consider would a lower interest rate on your home loan equate to a greater saving on your home loan repayments than the amount of interest you would earn if the savings in the offset account were in a savings account?
The pros and cons of paying down your mortgage
If your dream is to own your own home outright, it may be tempting to use any extra funds you may have decided to bypass the offset account and instead pay down your mortgage, even if this means going through the process of refinancing your existing home loan. Moneysmart is a government resource that has several free tools where you can plug in your info and take a look at your own refinancing options.
Pouring extra funds into your mortgage can reduce your debt or even leave you debt-free, depending on the spare funds you have at hand. During volatile times (like a global pandemic!) knowing the roof over your head is paid for can provide great peace of mind.
Alternatively, if your goal is to grow your wealth for the future, using those funds to build a share portfolio instead could potentially earn a better return on your money than you’d get paying off your house. However, keep in mind that the higher the reward usually the higher the risk. Here is a neutral resource on choosing shares to buy.
At any rate, it’s worth considering both options to see what makes sense for you.
The pros and cons of investing
Investing into shares or superannuation could possibly earn more in the long term than it might sitting in a mortgage, if you diversify your investments and make the most of compound interest and potentially higher returns. Ditto buying an investment property, if you do the legwork and buy in a high-growth area where there’s a demand for rentals. Having said that, both these strategies are not guaranteed, and come with risk, so the term “could possibly” are the operative words to consider. Make sure you understand the risks of both strategies.
It’s important to remember that all types of investments are not without risk, tax considerations or extra fees and charges – so doing your research is essential. Finding a good accountant is a great start, as is getting advice from a registered financial adviser.
How to decide where to allocate your money
Choosing safe options or more aggressive investment strategies comes down to a number of factors. Here are a few things you might want to consider.
Your life stage
When we’re young, we have more time to weather the dips and flows of the market and so may choose higher-risk investments, unlike older investors, who may prioritise a more conservative investment strategy and aim at being completely debt-free.
Your personal circumstances
Do you have a family to support? Do you have a lot of debt? Take stock of your financial position and consider whether to reduce debts before investing or not.
Your appetite for risk
Investing in shares or property can net great returns, but it’s a long game due to the rise and fall of the market. You’ll also want to consider accessibility of your investments – whether you may need to liquidate shares for spare cash or to sell property, and which would be quicker and easier for you.
How secure is your job? Are you permanent, or self-employed and dealing with an unpredictable cash flow? If you feel confident about your income, you may be more open to taking on more financial risk or investing more aggressively.
The pandemic has caused a lot of volatility in the international market, but some experts suggest that a downturn in the market might not be a bad time to start a portfolio, as you could potentially pick up good quality stocks and shares in particular areas of the market at a reduced price during a crisis. In the same manner, the economy can be unpredictable, and many people will have lost value in stocks in other areas of the market due to the pandemic.
So, where to invest?
Ultimately, choosing where to invest your spare cash is a big decision that requires lots of research and professional advice – especially if you’re on the fence about what to do.
Chatting to a financial adviser is a great first step, as they’ll talk through your risk profile and current financial situation and help guide you to make decisions that are right for your personal circumstances.
Planning for your future is important and comparing insurance policies shouldn’t be something that daunts you. Choosi is here to help. Start comparing a range of policies with Choosi today.
27 Jul 2021