Mortgage maths a taxing problem

IF you have a burning money issue, or you want to win a fight with your spouse, put your questions to Barefoot Investor.

House buying

IF you have a burning money issue, or you want to win a fight with your spouse, put your questions to Barefoot Investor.

Q Hello Scott,

Am I crazy for paying off a house when I could be saving? Let me explain.

I'm paying off an investment property at 6.07 per cent with $420,000 remaining. Repayments are $700 a week, plus $100 week for rates, insurance and maintenance. My rental income is $400 week. My total spend  - if I pay off the house in 30 years - is about $1.1 million. But if I put $400 a week into a high-interest savings account (say 5.71 per cent at UBank, which I saw recently) for 30 years, I'll make about $1.5 million. So am I crazy?

Thanks heaps, Dean

A Hey Dean,

There's a missing piece to your puzzle: the taxman. That 5.71 per cent that UBank are paying would be slashed by more than a third in tax if you earn more than $37,000.

A better solution is to focus on paying down your mortgage. You'll save hundreds of thousands of dollars in interest costs (it's compounding in reverse), and you don't pay tax on the interest you save.

Let's talk numbers: If you kept paying $700 a week and also paid the rental income ($400) straight into your loan, you'd pay off the house in nine years and nine months, saving you more than $350,000 in interest.

By then you'd be in the habit of saving $1100 a week, so I'd want you to invest this into a share portfolio over a 20-year period. If you averaged 9 per cent after tax returns, your balance would be a cool $2 million.

HOME TRUTHS

Q Hi Scott,

I'm 30 and I have more than $150,000 in a term deposit and $70,000 in shares. I want to buy a house but I'm waiting for the market to "correct itself", because I don't want to see those savings dwindle away. To increase my wealth even further, what else would you do with the money while the housing market comes back to reality?

Thanks, Nick

A Nick,

Don't save up sex for your old age. In other words, don't put your life on hold for an event that may happen years from now. Yes, our housing market is the most overvalued in the world. But buying a home isn't just a financial decision, it's an emotional one, too. So long as you have a 20 per cent deposit and you can afford to make extra repayments on one wage - buy. You won't regret it.

HOUSE OR CAR?

Q Hey Scott,

I am 26 years old and I have a 1994 car. I would really, really like to buy a newer model, something around the $25,000 mark. Having a new car will save on petrol and maintenance costs .

The only problem is that I also want to buy my first house, but getting a loan for a new car would affect my borrowing power. What do you recommend?

Dan

A Hey Dan,

If you want to buy the house, don't buy the bloody car.

SUPER STUMPER

Q Hi Scott,

My biggest concern is whether to leave my money in Australian Super or withdraw it and place it in a more secure setting, like a term deposit with one of the banks. I retired three years ago, so I have no more super being added to the fund.

Regards, Susan

A Hi Susan,

Keep your money in super, drawing a pension, which in most cases will mean paying little or no tax. And keep your money with Australian Super. It's a big fund that offers many investment choices, like cash and fixed interest securities - not just shares.

PRENUP UPSET

Q Hi Scott,

After months of hinting, my fiance has come out and asked me to sign a prenuptial agreement.

He owns a number of investment properties and is much wealthier than me. The whole thing has really upset me, which he translates into me wanting his money (but it's not that at all). Any advice?

Lori

A Hi Lori,

Your fiance sounds like a douchebag. You think it means he doesn't trust you. But I think if you dig a little deeper you'll find that he doesn't trust himself, which is why he's trying to leave a legal loophole open.

If I were in your shoes, I wouldn't sign a damn thing - and it would make me rethink everything.