Should we invest the money in our redraw account, or leave it there?
My wife and I recently purchased a property for approximately $1.6 million with a $500,000 loan. Currently, we have around $200,000 sitting in the loan’s redraw facility, along with a share portfolio – $60,000 between us and $10,000 for each child (kids aged two and five), with ongoing monthly contributions.
We’re considering whether to use some of the funds in the redraw for investments or keep them on the loan to reduce interest. We’d love to hear your thoughts on the best approach.
Congratulations on getting yourself into a strong financial position at this stage of life.
When it comes to choosing between keeping your money in your mortgage, or investing it, it all comes down to your appetite for risk.Credit: Simon Letch
Your question could be distilled down to one of risk appetite. Leaving those funds in the mortgage produces a guaranteed saving equivalent to the interest cost of the mortgage. This is an after-tax outcome, so if you wanted to get really analytical, you would gross this up based on your marginal tax rate.
Given the strength of your balance sheet, it seems likely to me that you are high-income earners, and therefore your marginal tax rate is likely high. Based on the top marginal tax rate, the effective gross return by having this money sit in a mortgage would be approximately 11 per cent, which is pretty tough to beat.
All the more so when you consider this is essentially a guaranteed return. I say essentially because the RBA might shift interest rates, and that would alter the numbers.
The low-risk approach is to stick with what you’ve got, and keep debt at a minimum.
But regardless, there will always be a cost associated with your mortgage, and so minimising this debt certainly produces a saving, and that serves to strengthen your household balance sheet.
If you did have an aggressive risk preference, and were keen to use the equity in your home for investment purposes, it would be better to establish a fresh loan purely for investment purposes so that the interest expense is tax-deductible.
