Paying Off Your Mortgage vs Investing In Property - What is Best in the Long Run?
Paying off your mortgage vs investing in property is a common debate as both are popular strategies for trying to achieve financial independence.
Paying off your home mortgage early has undeniable appeal. Eliminating mortgage debt can provide you with a sense of security and peace of mind, knowing that your home is owned outright. Being debt-free also reduces your financial risk, especially during economic downturns or job loss, where cash flow may become unpredictable.
By paying off your mortgage ahead of schedule, you can save thousands of dollars in interest over the loan term, increasing your net savings.
However, in our latest podcast episode with buyer’s agent, Daniel Walsh from Your Property Your Wealth, we discuss the importance of building a significant net worth to sustain your lifestyle through passive income.
In the long run, investing in property is a way to achieve passive income that can supplement your primary income from a job or business, or completely pay for your lifestyle and allow you to retire early. Either way, passive income contributes to your long-term financial stability.
Watch or listen to this episode in full to learn the importance of self-identity, starting early in property investment and seeking knowledge and support from other successful individuals. This episode also talks about the importance of mindset, financial literacy, passing on knowledge and assets to future generations, and the concept of retiring younger and richer.
What is the Middle-Class Mindset?
Daniel defines the term “middle-class” as a way of thinking rather than an income level. Middle-class people typically follow conventional financial paths, such as climbing the corporate ladder, buying a house, and paying down a mortgage. However, those who take this traditional approach often don’t have a deep understanding of how money and debt work.
This approach can be flawed due to inflation and the devaluation of currency, which reduces the real value of your income and savings over time. Many people mistakenly believe they have savings when they actually have offset debts. Daniel argues that real wealth comes from investing in assets rather than simply paying off debt, as assets appreciate over time while the purchasing power of savings declines due to inflation.
You may find that you need to shift your mindset to break free from traditional middle-class financial habits. Understand that debt, when managed correctly, can be a powerful tool for wealth creation. Stop merely saving money and paying down your mortgage and start strategically using debt to acquire more appreciating assets like property.
The notion that paying off your home’s mortgage should be your first financial priority is not always the best way. Investing in property before paying off your first mortgage can significantly reduce your long-term financial risk and increase the potential of complete financial freedom.
Property Investment vs. Mortgage Payoff
Instead of paying your first mortgage off as fast as you can, think about managing this debt strategically to buy assets that appreciate over time.
Rather than focusing on paying off your debt, you should aim to control and leverage it to acquire more property.
This approach is very similar to how governments manage their finances—by acquiring debt and injecting money into the economy, which devalues the currency but inflates the value of assets.
Imagine you’re managing your own finances like a government manages its budget. Governments often borrow money (take on debt) to fund projects or cover budget deficits. This borrowing increases the amount of money circulating in the economy.
When more money circulates, it can lead to inflation over time. This means the purchasing power of each dollar decreases, as prices for goods and services go up. Properties also become more expensive as the value of money decreases.
Using debt as a tool to enhance your financial position and grow your wealth through asset appreciation. Investing in more property rather than paying off your first mortgage can lead to greater financial gains over the long term.
The Real Risk is Missing Out on Compounding Growth
The real risk lies in not investing in property early enough and missing out on the compounding growth of your assets.
Property tends to appreciate over time, often outpacing the negative impact of interest rates and inflation. By holding onto these property assets for the long term, you can benefit from exponential returns, as property values and rental incomes increase significantly over the next few decades.
Buying investment property and taking on debt at a younger age is less risky because time is on your side, allowing the value of these assets to grow while the relative cost of your debt diminishes due to inflation.
Trying to acquire assets later in life is riskier due to the shorter time frame to get returns from your investment and you will find you will also have a reduced appetite for risk the older you get.
It is important to have a long-term investment perspective and allow for the natural growth and appreciation of your property assets. The earlier you start investing, the more time there is to benefit from the compounding growth of your property assets, making it crucial for your long-term financial stability.
Tax Advantages of Property Investment
There are some tax advantages to accumulating wealth through property investment. Unlike your normal income from a job or owning a business, which is taxed heavily, equity gains in property are not taxed until they are “realised” when you sell the property and have the cash in your hand.
This deferral of taxes on unrealised gains enables you to maximise your returns allowing you to reinvest using your equity without the immediate tax liabilities and grow your wealth more efficiently.
Pay Off Mortgage vs Invest Calculator
The ongoing debate of property investment vs. mortgage payoff proves it is a big decision to make but we are certainly advocating for the benefits of investing to achieve greater financial success.
Use our mortgage repayment calculator to see how different repayments can save you money in interest over the lifetime of your mortgage. Then think about how much an investment property (that you bought using equity and you have rented out to help cover costs) will appreciate over the next 20-30 years. Chat to our investment brokers today to see what using your mortgage debt to buy property assets looks like for you.
Also check out platforms like our YouTube channel and podcasts, which provide free information from successful property investors and industry experts.
By surrounding yourself with positive influences and hearing from those who have achieved financial success, you can learn the strategies and mindset shifts that will transform your financial future.
