Ask An Advisor

Hello and welcome back to Ask An Advisor.

One of the most common money questions we get asked at the moment is “should I pay off my mortgage or invest?”

We acknowledge that not everyone has a mortgage - including the two of us (not for lack of trying!) - but the framework around deciding how to approach this can be applied more broadly on your investing journey.

Before we get stuck into this question and how to approach it, a reminder that we have our referral prizes still running this week.

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Have a great day!

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The week’s question

"I was given advice that I should forget about investing and focus on my mortgage only…. [The advisor] also made a comment that insinuated that investing is shares is for people with more money. As I’ve been getting really excited to get into the world of investing, I just wondered if you would agree?”

- Michael, Sunshine Coast

This week’s advice

This week’s advisor is Patrick Malcolm, from GFM Wealth Advisory.

The is an excerpt from the latest Ask An Advisor episode where Michael asked this question to Patrick.

This was Patrick’s response to Michael’s question:

Patrick: The first thing is I must disagree with the sort of assertion that investing is just for rich people. 

That's just complete garbage.

I think anyone can invest and one of the benefits that we've had with technology is investing is far more accessible than what it used to be.

You're not calling up some guy at the stock exchange to buy shares. You can do it online and you can do it online pretty quickly. So anyone with any sort of money that's got the cash flow can invest.

[To the mortgage question] it's a really, really tough question because in this environment, with interest rates being so high, that hurdle rate that you need to achieve to make that investment worthwhile is a lot higher.

If your mortgage had a 1% at the start of it - which was the case a little while ago - the hurdle rate that you need to target on your investment wasn't very high to beat that mortgage rate of 1%.

Now we're sort of up in the 6’s.

So your investment needs to generate an after-tax return [of greater than 6%] to exceed the benefit of paying down your mortgage.

The hardest thing in financial planning is it can be a very precise science. There's an answer that's going to be right or wrong here, depending on what that investment produces in the future.

But to think that the investment would need to produce a rate of return of say, 10% to beat your mortgage - considering tax - is really hard.

At the same time, I think we focus very much on diversification from an asset class perspective.

I think diversification of strategy is important as well. Not having all your eggs in one basket, i.e. not paying everything off the mortgage. Maybe carving a little bit of what you're repaying additionally to that mortgage to invest, isn't such a bad idea.

So I know I've sort of straddled the camps there, but the reference point is it's a harder environment to beat that after-tax return because interest rates are a lot higher. But at the same time, I think investing a little bit isn’t such a bad thing.

About Patrick Malcolm

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