Martin Hawes: Take your focus off the mortgage

Conventional financial wisdom has long held that you should use any spare money - either lump sum or ongoing income - to pay off the mortgage. There are a few exceptions (KiwiSaver and other subsidised super schemes in particular) but as an adviser I have, for a long time, told most people to get rid of the mortgage before starting to invest.

The thinking behind this has been that with mortgage interest rates sitting where they have been recently at around 9 per cent, you have to find an investment which returns more than 9 per cent after tax to be as well off. That is not easy to do - it is not impossible, but you have to take a lot of risk to do it.

However, mortgage interest rates have fallen and will almost certainly continue to fall. This means we have to review the numbers, re-examine conventional wisdom and look afresh at whether people should still pay off the mortgage in priority to making investments.

The investment return threshold that investors with mortgages need to meet to be better off than if they just paid down their mortgages is now nearer 6 per cent rather than the 9-10 per cent that it was just a few months ago. So if you have some spare money, the question is: Can you find investments that will give you 6 per cent after tax?

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Posted: 1 Feb 2009

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