The traditional financial advice is that paying down your mortgage is generally a sensible strategy for owner-occupiers and property investor alike. This makes sense for most because it means you are gradually building your equity in your home, which reduces your risk in the face of a rise in interest rates or a change in your individual circumstances. However, this traditional advice may not be right for everyone. We discuss below when not paying off your mortgage may make sense.
There are a couple of key considerations here. Firstly, interest rates are at historic lows and the Reserve Bank has guided that this is unlikely to change in the foreseeable future. This means the opportunity cost of increasing your equity in your own property is relatively high since the cost of debt is so low. As a result, property owners need to ask themselves whether paying down their mortgage is the best use of their spare funds versus the vast array of investment opportunities available to them.
Secondly, property prices have risen particularly strongly since the first COVID-19 lockdowns in March 2020. This means that loan to value ratios have generally decreased significantly during the same period. From a purely financial perspective, this suggests that the risk profile of owning property has decreased for many, which reduces the risk reduction benefits of paying down mortgages for some.
It’s the combination of these two factors which creates the opportunities for some property owners to do more with their funds than to pay down their mortgage. Some will take advantage of their lower loan to value ratio to buy another property. Others will happily service their current mortgages without paying them down and instead pursue better returns from other investments.
Landen’s Director Jim Dionysatos believes property owners should consider their own position rather than listening to general advice: ‘There are a number of ways to manage your mortgage but the key is to follow an investment plan which is customised to your individual circumstances, and which will allow you to meet your long term goals. For some, that may mean not paying their mortgage down.’