Adventure Money has put together a great article comparing the differing advice of two financial gurus. It is a great idea for a blog series.
I started out trying to put all my savings into paying off my mortgage. It worked well initially as it gave me a great deal of satisfaction seeing my loan go down. Later I realized that I wasn’t increasing my overall wealth, especially as housing prices started to level off.
I know when I first got my mortgage, I wasn’t earning very much. The repayments were more than the rent I was previously paying. Gradually over time, my salary increased and I was putting my savings into paying off the principle.
I later moved to Japan and rented the property out. It was a great feeling having someone else pay off my loan. I eventually realized I had all of this equity just sitting there which I wasn’t getting much return on. I was able to refinance to then buy further properties.
I haven’t had any recent valuations, but I know I could easily buy more property if I wanted, just by recycling the equity. As long as property values continue to increase, which they generally do in Australia and New Zealand, it is probably one of the easiest ways to accumulate wealth.
One word of warning though, never refinance your loan to buy a non-appreciative asset like a car, holiday or house renovation. I don’t think it is even a good idea to restructure your debt (credit cards, personal loans)using your mortgage.
Here is one way not to manage your financial affairs.
Disclaimer: This is just my opinion, seek professional advice before making any financial decisions.
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Good advice and thanks for the mention!
I think you hit the end result on the nose. For my internal comparisons, I look at my mortgage rate, and look at the cost of more capital, and then look at the returns I can get by investing the money instead of putting it into equity.
For instance, if my current mortgage is 5.4%, and a new mortgage would be 6.3%. Loan would be something like 8%, and the return I use as a cuttoff is 10%, then it makes little sense to pay off now.
Your point about rolling equity into new properties is very good so long as things are apriciating and you have a long term view. It is very important to keep close tabs on everything as it will keep you highly leveraged. (a downturn could cause huge problems) Of course over the long term property is almost always going up.
I agree that you should never refi to buy non-appreciative assets.
You’re also right about using your equity to _responsibly_ expand your holdings, which can even be done according to your desired level of risk.
Funny, I just recently wrote about this this on my blog:
http://www.landlordshmandlord.com/2006/12/01/how-beneficial-is-it-to-make-extra-mortgage-payments-each-year/