Sell the house to pay off the debt

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

06/02/2009 BUSINESS: Scott Pape. The Barefoot Investor. HWT staff.

QUESTION: We’re trying to get ahead but don’t know where to start. We have two young children and I’m about to start maternity leave, so we’ll go down to one income (we currently earn $150k). We owe $18k on a credit card (used solely for medical expenses) and $38k on a personal loan. We are renting but have two investment properties interstate, neither of which has increased in value over the last five years (one is worth $150k and we owe $125k, the other is worth $450k and we owe $360k). Please help!

Tania

 

ANSWER: At the risk of being Captain Obvious, you need to pay off the $56,000 in credit card and personal loan debt — pronto. If I were in your shoes, I’d sell the investment property with the $90,000 equity and use it to pay off the debt. Then I’d put the surplus (which may be somewhat diminished due to capital gains tax on the sale of the house) into a high-interest online savings account.

 

THERE’S NO TIME LIKE NOW TO INVEST

Q: I set up my self-managed super fund (SMSF) about two years ago, and the entire $260,000 is still sitting 100 per cent in cash. I rolled out of my industry fund and then got distracted. So I’ve missed out on about 20 per cent worth of gains that I would have earned if I had stayed put. I am 44, now self-employed, and a long-term Barefooter. Should I invest it all? Or do you think the share market is too expensive right now?

Tim

 

A: Warren Buffett was asked this exact question (about three times) at his annual shareholders’ meeting last week, so I’ll defer to him: “If interest rates stay this low for the next five or 10 years, well, stocks are very cheap right now. We’ll look back and say they were very cheap. However, if rates go up … then they’re not cheap.” Basically, Buffett is saying that sustained low interest rates are causing investors to take extra risks with their money, and that’s what’s driving the sharemarket higher. The longer they stay low, the more money will head into shares. If rates jump, investors will move to fixed interest investments. But here’s the thing: Buffett didn’t become the wealthiest investor in the world by taking a punt on where the market is heading. Instead, he just buys good-quality businesses at a fair price. I’d follow his lead. You need to give up trying to time your entry into the market, because it can’t be done — and in hindsight, the “right time” for you to be invested was 24 months ago! My suggestion would be to work out an investment portfolio you’re comfortable with (with a range of investments and asset classes), then drip-feed your money into the market over the next year. Do it systematically: invest 25 per cent per quarter, or a certain amount each month. The real key is to actually do it!

 

SON’S PHONE PLAN LEFT ME ON RECORD

Q: A few years ago I took out a mobile phone plan in my name for my son. After a while he didn’t pay the bill and, as it was in my name, I now have the bad debt recorded with Veda. My question is: what happens once this bill is paid? Does the bad debt get wiped from my credit report, and after how long does this happen? It’s stressing me out, but I guess I’ve learnt my lesson well.

Michael

 

A: The fact that you’ve paid the debt will be included on your credit file, but the default will remain for five years. If you haven’t already done it, you should contact Veda and get a (free) copy of your credit file, so you can see where you stand. Also, make sure your phone company has updated your credit file. If not, make them!

 

THE MONEY’S GOOD IF THE RATE’S RIGHT

Q: You answered a question about the FHSA scheme a few months back, saying there may be positive developments in the pipeline. I received an offer from ME Bank suggesting I could get $2000 cash back if I apply for a home loan with them. Is this the deal you talked about?

Chris

 

A: No, it’s not. It’s a marketing offer to sell their home loans (whether this is a good deal or not depends on the rate you get). As far as ME Bank’s FHSA account holders, like you, are concerned, here’s what’s happening: after June 30 your money will be moved into an ME Bank online savings account. You can then do whatever you want with it. ME Bank tells me they’re still planning to offer a replacement to the FHSA, but it likely won’t be launched until later in the year. I’ll keep you updated.

 

IT’S ALL ABOUT RISK WHEN RECYCLING

Q: My husband and I saw a financial planner who recommended a process called “debt recycling” to turn “bad debt” (non-deductible mortgage on the home) into “good debt” (tax-deductible debt used to invest in shares). We are relatively high-income earners, and are in our early thirties. Do you think this is a good strategy? Or should we pay off the home loan and then enter the stock market? So far we have paid about $170k off our $550k mortgage.

Brodie

 

A: “Debt recycling” sounds like something Bob Brown would do, right? Maybe. Basically, the strategy involves you reducing your non-tax-deductible mortgage debt and taking out an investment loan to build up a share portfolio — and let the dividends from the shares help pay off your mortgage. Whether it’s right for you depends on the answers to the these questions: How do you feel about taking out a loan to buy shares? If interest rates climb, or the sharemarket drops, how would you react? Would you stay the course? That gets to the guts of it: how comfortable are you about putting your family home on the line? Your other option is simple, but effective: make extra repayments on your mortgage.

 

barefootinvestor.com

Originally published as Sell the house to pay off the debt