While there is speculation the Reserve Bank of Australia (RBA) could further reduce interest rates to stimulate the economy, at a quarter of a per cent interest rates are very unlikely to go much lower, it is time to re-think the strategy, according to Wealth Within.
Wealth Within’s chief analyst, Dale Gillham, said it would be also highly likely that this low interest rate environment would last a few more years so now was a great time to look at the benefits of reducing your mortgage versus using the extra cash flow and/or home equity to fund further investments.
Gillham stressed that the stock market historically served as a leading indicator of the economy and looking back at the growth of the All Ordinaries Index since 1 January, 2016, it rose just over 13% which is far from being spectacular not indicating a booming economy.
“While I am all for reducing debt on your home loan as quickly as possible, there comes a time when it is more beneficial to use the equity in your home to invest for your future. As all too often, people pay off their home loan before looking to invest, as they believe this creates more financial security,” he said.
“However, while this may be somewhat true, the mere fact of paying off your home loan before you invest severely restricts your ability to create wealth.”
The opposing argument, according to him, would be to create more wealth in your life, especially when you consider that investing in good assets could also lead to paying off your home loan faster.
“More importantly, building wealth earlier in life results in more assets in retirement, which has to be good. Everyone should look at this low interest rate environment as a once in a lifetime opportunity to not only reduce housing debt but also invest for the future. Of course, if the government relaxes lending laws, the opportunity will get even bigger,” Gillham added.
