Using your mortgage to create extra wealth

For many people, reducing the mortgage as fast as possible is a wise strategy to use on the path to financial security. But if you think outside the square there are some options that might be available which involve maintaining or even increasing your level of debt for investment purposes.

A case study…

The experience of James and Lisa shows just how restructuring your mortgage can bring your financial objectives within reach, in a way you never thought possible.

James and Lisa earn $135,000 a year between them but they have concerns as to how they could achieve their long-term personal objectives.

Lisa works part-time and with two very young children feels that if she went full-time the cost of childcare would be prohibitive. She also wants to be at home with the children until they reach school age. Additionally, they have longer-term objectives of owning a holiday property and covering the costs of the children’s secondary education.

With the help of their adviser, the plan they could adopt begins with Lisa giving up work altogether. They could borrow an additional $100,000 on their mortgage and invest this in a diversified portfolio. The result is:

  • Lisa can give up work to look after the children;
  • As Lisa no longer earns an income she is eligible to receive Family Tax Benefit B;
  • Due to the reduction in their combined income, they are now also eligible to receive a portion of the Family Tax Benefit A;
  • As a result of interest on the investment loan, their combined taxable income has reduced. This leads to a $3,000 tax refund which is applied to paying off the mortgage;
  • The investment portfolio will mature about the time the children commence secondary education and, in the meantime, generates a return of some $7,000 a year, which is also applied to reducing their mortgage.
  • They are now on track for their $275,000 mortgage to be paid out in 16 years instead of 30 years.

Without affecting their standard of living, James and Lisa have achieved their short-term family objectives, while also bringing them closer to their long-term goals.

Of course, no two scenarios are the same so it is vital to look at your own financial position and goals – including insurance needs, structuring the right investment portfolio and making sure your cash flow is planned out. Talk to a licensed financial adviser to get the right advice for you.