Should we invest the money in our redraw account, or leave it there?

My wife and I recently purchased a property for approximately $1.6 million with a $500,000 loan. Currently, we have around $200,000 sitting in the loan’s redraw facility, along with a share portfolio – $60,000 between us and $10,000 for each child (kids aged two and five), with ongoing monthly contributions.

We’re considering whether to use some of the funds in the redraw for investments or keep them on the loan to reduce interest. We’d love to hear your thoughts on the best approach.

Congratulations on getting yourself into a strong financial position at this stage of life.

When it comes to choosing between keeping your money in your mortgage, or investing it, it all comes down to your appetite for risk.Credit: Simon Letch

Your question could be distilled down to one of risk appetite. Leaving those funds in the mortgage produces a guaranteed saving equivalent to the interest cost of the mortgage. This is an after-tax outcome, so if you wanted to get really analytical, you would gross this up based on your marginal tax rate.

Given the strength of your balance sheet, it seems likely to me that you are high-income earners, and therefore your marginal tax rate is likely high. Based on the top marginal tax rate, the effective gross return by having this money sit in a mortgage would be approximately 11 per cent, which is pretty tough to beat.

All the more so when you consider this is essentially a guaranteed return. I say essentially because the RBA might shift interest rates, and that would alter the numbers.

The low-risk approach is to stick with what you’ve got, and keep debt at a minimum.

But regardless, there will always be a cost associated with your mortgage, and so minimising this debt certainly produces a saving, and that serves to strengthen your household balance sheet.

If you did have an aggressive risk preference, and were keen to use the equity in your home for investment purposes, it would be better to establish a fresh loan purely for investment purposes so that the interest expense is tax-deductible.

This would be a long-term strategy, as the investments that you purchased would want to have a strong bias to capital appreciation, and therefore a suitable time frame is likely to be seven-plus years.

This bias is because provided you hold the asset for at least one year, you only pay tax on half the gain. You also control the timing of tax being due.

Were you to head down this path, you would want to be confident that your household income was quite resilient. As mentioned, the best investment portfolio for this strategy would be one with a strong bias towards growth rather than income.

That being the case, your employment income will be required to meet the loan repayments. A bad outcome here would be a market fall associated with a recession, where you found yourself made redundant, while the value of your investment had declined.

A forced liquidation of the investment portfolio at such a point would be highly likely to produce a loss for you. A geared investment strategy is most suitable for those with highly reliable incomes. For a couple, the diversification benefits of two distinct incomes is also a real positive.

Which circles back to where I started: this is really a question about your appetite for risk. The low-risk approach is to stick with what you’ve got and keep debt at a minimum.

The more aggressive approach would be to use the equity in your home for investment purposes. The best approach for you requires some reflection between you and your wife.

Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the Financial Autonomy podcast. Questions to: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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