Hard-core property investors and people who profit from the sale and purchase of property such as agents, property finders, and gurus push the message of remortgaging to buy more property.
“Never pay your mortgage off,” they say. As soon as you have some spare equity built up your mortgage that you can borrow against, leverage that money and buy an investment property.
It’s the polar opposite of paying down debt on your home loan to become mortgage free.
Those that have the nerve and energy to borrow against their homes and buy more property can build up capital (AKA “create wealth”) fast in a rising property market.
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Taking that sort of risk with the family home doesn’t suit everyone. Some Kiwis are more comfortable to taking the traditional route and paying down the mortgage bit by bit. It’s the good old-fashioned way of buying young, working hard, paying down the mortgage and retiring comfortably.
That doesn’t sit well in our get rich quick culture where property investment is seen by some as the obvious route to wealth. Why pay down your mortgage when you can use the equity to build more wealth? It works for those with dreams, discipline, and drive.
Others who lie awake worrying about tenants smoking methamphetamine in the house or how to pay the mortgage may not be suited to property investment – even at arm’s length through a property manager.
Betting the family home on the property cycle
Mortgage broker Geoff Bawden, warns mum and dad investors to be careful before betting the family home on the property cycle. Don’t buy investment property simply because everyone says it’s a good idea.
“I always think before you get too carried away getting into investment you should hit your own mortgage first,” Bawden says.
Homeowners effectively earn the equivalent of their mortgage rate on the money they’ve paid down and it’s tax free return.
Creating wriggle room
“You are improving your financial position anyway by doing this and providing a much stronger base to build on later,” he says.
“Ask yourself, am I investing for my future or am I speculating?” If you wait until you’ve built up 35 to 40 per cent equity in the home you have some wriggle room, says Bawden.
Investing or spending
Leveraging up to invest isn’t the same equation as remortgaging to fund a lifestyle that income from the day job doesn’t allow.
Some home owners use their mortgages as piggy banks to live beyond their means. They pay off credit card debt, upgrade their cars or kitchen or bathroom by dipping into their “spare equity”. These lifestyle assets go down in value not up and so are typically not a good investment.
Closing and cross collateralisation
Once you’ve paid the mortgage off, keeping it open gives you more options in the future. It makes it easier to borrow against the house in the future.
There are some people, however, who really need to close the mortgage. If you’ve ever had banking with an ex-partner or guaranteed someone else’s mortgage or loan beware. You’ve almost certainly signed an agreement which means you’re cross collateralised with that person even if it was decades ago . That makes you legally liable for the other person’s future debt. The Banking Ombudsman hears cases where parents suddenly find they’re liable for new debt they knew nothing about because they’d guaranteed the children’s other loans years earlier.
Undoing cross collateralisation isn’t always easy. You need the bank’s permission. If the other party has lending still outstanding you may not be allowed to break the tie.
