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Many homeowners struggle with the decision to pay off their home loan before investing in property. With interest rates fluctuating and Aussie property markets defying the odds, it’s not always clear which path offers the right mix of financial security and growth potential.

Sure, if you pay off your home loan,  you’ll have plenty of equity and borrowing power. And there’ll be less stress sitting on your shoulders. But, is this more important than having someone else (AKA a tenant) pay off a huge asset in your name?

In this article, I’ll explore the pros and cons of paying off your home loan either before or while you’re paying off an investment property portfolio. By understanding both sides of the equation, you can make a more informed decision that aligns with your financial goals and circumstances.

 Benefits of paying off your home loan first

Paying off your home loan before investing in property can offer significant advantages. Here are some key benefits to consider:

Reduced financial stress and risk

Eliminating your home loan reduces your financial stress. Without the burden of a mortgage, you have more disposable income and fewer financial obligations.

Increased equity and ownership

Paying off your home loan increases your home equity. This can provide a stronger financial foundation and increase your net worth, offering more security and potential borrowing power in the future.

Potential for better loan terms in the future

With a fully paid-off home, you may be viewed more favourably by lenders. This can lead to better loan terms and lower interest rates when you decide to invest in property later.

Peace of mind and financial security

Achieving a debt-free status provides peace of mind. Financial security allows you to focus on long-term goals and reduces the worry associated with financial instability.

Benefits of investing in property while paying off your home

Investing in property before paying off your home loan can also be a strategic move. This is usually done when you have paid it down to have enough equity or surplus cash in the monthly budget to cover the costs of an investment property.

Here are some key advantages to consider:

Opportunity for capital growth and rental income

Investing in property can provide opportunities for capital growth and rental income. As property values increase, your investment can appreciate, and rental income can offer a steady cash flow.

Diversification of investment portfolio

Investing in property allows you to diversify your investment portfolio. Diversification can spread risk across different asset classes, reducing the impact of market volatility on your overall financial health.

Taking advantage of favourable market conditions

Favourable market conditions can make property investment more attractive. Low interest rates and high demand for rental properties can enhance the profitability of your investment.

Using an investment property’s equity to reduce your home loan

Another strategy involves purchasing an investment property, waiting for it to gain some equity, and then using the profit from its sale to pay down your home loan.

Using increases in rental income to pay down your home loan

Some investors leverage rental income increases to pay down their home loan balances faster than originally planned.

Tax and lifestyle benefits

Upgraders sometimes buy a property, rent it out for a couple of years, and then move in and sell their previous home. This lets them purchase their dream property early, get some tax deductions for the first couple of years and use the rental income to help pay down the debt.

OK great, but what about the risks?

Like any investment vehicle, investing in property before paying off your home loan comes with its own set of risks. Understanding these can help you make an informed decision.

Risks associated with property investment

• Market fluctuations: Property values can be volatile. Economic changes can impact property prices, potentially leading to losses.
• Vacancy rates: Rental properties might experience periods of vacancy. This can affect your rental income and overall return on investment.
• Maintenance costs: Owning investment properties incurs ongoing maintenance and repair costs. These expenses can add up and impact your profitability.

However, these risks can be mitigated:

• Thorough research and due diligence: Conduct detailed market research. Understanding the local property market and economic trends can help you make informed investment decisions.
• Seeking professional advice: Consult with financial advisors and real estate professionals. Their expertise can guide you in managing risks and maximising returns.
• Building a financial buffer: Maintain a financial buffer to cover unexpected expenses and periods of vacancy. This ensures financial stability and reduces stress.

And is it actually *that* difficult to become a property investor?

Many people believe that becoming a property investor is a complex and daunting task. However, with the right approach, and the right advisors by your side (that’s us!), it can be more manageable than you might think.

Common misconceptions about property investment:

• High entry costs: While property investment does require capital, various financing options can make it accessible.
• Complex management: Managing investment properties can be streamlined with the help of property managers and modern tools.
• High risk: With thorough research and strategic planning, risks can be mitigated effectively.

Steps to becoming a property investor:

• Setting clear investment goals: Define what you want to achieve with your investment. Clear goals guide your decisions and strategy.
• Educating yourself about the market: Learn about the property market, investment strategies, and financial planning. Knowledge reduces uncertainty and improves decision-making.
• Building a solid investment strategy: Develop a comprehensive investment plan. Consider factors like location, property type, and financing options.
• Seeking professional guidance: Consult with experts in their fields (think: property advisory, accounting, finance–again, that’s us!)

Your next step: Request a Free 30-Minute Finance Strategy Session

Hopefully you’ve seen that investing in property isn’t as daunting as it seems. And it can be a great way to generate family wealth, when done with help from experienced advisors. If you’re looking for an expert team (and a broker with premium status) to help you evaluate your current position, explain your borrowing capacity, and help you finally become a property investor, request a Free 30-Minute Finance Strategy Session during which you will…

• Get a realistic understanding of your current situation… and how much you might be able to borrow to purchase your first investment
• Get a better understanding of the lending options available to you
• Discover ways to save money on interest, fees, and charges that are specific to your unique situation
• Get an up-to-date picture of the lending landscape including rates, conditions, and how to structure loans
• Learn about our process to find you a loan that could save you thousands.

This no-obligation free session will be held with one of our experienced mortgage brokers. Please be assured this will not be a thinly disguised sales presentation. On the contrary, you’ll receive our best strategic advice, specific to your situation, so you too can accumulate multiple properties without sacrificing your current lifestyle and accelerate your progress towards wealth.

Schedule Your FREE 30-Minute Finance Strategy Session Today.

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Please note, the numbers and assumptions listed in this article are for educational purposes only. Individuals should seek specific advice pertaining to their unique situation and the real estate market before making any decisions.

Trilogy Funding Two is a corporate credit representative (Representative Number 506131) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237)