Many Australians who are currently paying off their home loans should take advantage of the low-interest-rate environment and invest to build up a sizeable fund that they could use in the future, an industry expert said.
The low-interest rate environment has made mortgage cheaper and easier to service, industry watcher Sebastian Brown said in a think piece in Motley Fool Australia.
"Conventional financial wisdom normally dictates that paying off non-deductible interest should be your first priority and therefore you should direct any surplus cash into your mortgage before you start investing," he said.
He explained that by making extra repayments on a 4.5% mortgage, the borrower is netting a 4.5% return on money. Considering inflation of about 2%, however, the yield becomes 2.5%. Brown said a "dirt-cheap market-tracking" exchange-traded fund (ETF) would be able to generate a higher return on investment.
"Instead of maxing out your mortgage repayments, you could put a little of this on the side and make small investments into an ETF every few months, while still paying down the mortgage. This money will compound at a much higher rate and leave you with a sizeable nest egg once the mortgage is eventually paid off," he said.
While the level of returns could reach 7% up to 10% in a long-term perspective, he warned that such ETFs could be volatile, and investors would likely lose money in some years.
"This strategy isn't for everyone and if you just want to get the banker off your back ASAP, then, by all means, go nuts. But it pays to at least consider your options and decide which strategy is best for you and your family," he said.
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