Never pay off your mortgage

[Dean@Massiveaction]

An American web site but I agree 100% with this guy!!

http://www.articlealley.com/article_87277_33.html

[Glenn]

Well I disagree.
When the interest rates are 9.5% like they are in NZ and the gross rate of return on investment property is 5% the rules change for some of us.
If one already has a few properties it does make sense to have an even higher equity to debt ratio.
Also once I have food on my table, provided for my retirement and kids, given a fair share away, and so on so on what better place to put the spare money than off the mortgage.
It sure makes more sense to take it off the mortgage than on deposit in the bank.
Note this does not mean I disagree with the principle of borrowing more money at some stage to buy another property. Nor does it mean that trading or selling off a mature investment to retire debt as apposed to using earnings to do it is a bad thing.

For some people at various stages in their investment life (no make that all the time) it is a good idea to show to both themselves and the bank that you can spend less on yourself than you earn.

I have come across lots of failed fools that spend more than they earn and I have no sympathy for them.

[whitt]

I think there are times when it does pay to pay off your mortgage.

An example:
Most Mum and Dad investors on average only ever get 1-2 investment properties. They are sometimes negativly geared.

I would recommend 2 things for these people when they start out.

1-Self manage the property. This way they learn through hands on experience and they save mangement fees. There is always a chance later on if there portfoilio grows to hand over the management. But the expereince they gain doing the first themselves is invalauble
2-Use P&I mortgages. This will slowly bring down the debt levels and increase cashflow. Especially important during a slump as house price growth becomes minimal. If they get aggressive and purchase more property later on then they can change to IO and not pay off the loan.

Remember that this is suited for the average Mum & Dad investor that are not out to have a large protfoilio of property. But it still gives flexibility to change later on should they decide so.

[McDuck]

Ok I deserve a good smack for working on a Sunday…but this is a good topic.

Why on earth not leave a few K unpaid on a mortgage?

The interest is negligible…and it gives you another line of credit should you need it unexpectedly.

Remembering that a perfectly good project can fail for nothing more that a temporary cash flow shortage.

It’s actually a very smart basic idea.

[whitt]

Why on earth not leave a few K unpaid on a mortgage?

Yes some investors use Line of credits or similar setup's as emergency funds.
A smart move in my opinion.

[jim34]

Line of credits

I use a line of credit loan on my house to purchase IP. It works really well especially if you have no mortgage owing on your house, but just using the line of credit to finance the IP's short term and then refinance a month or so later so you can buy again.

[Julian]

Everyone has a different on this. Technically, on the numbers alone, it is probably better not to pay off the loan (mortgage is the security - the loan is the loan), however us humans have our frailties, and for many of us, myself included, paying off principal is the right way to go.
Julian

[aka_G]

IMHO, pay off upto 50% is already SAFE. So better to use the rest of money to buy another PI. Nerver pay all off....Thinking about tax benefits as well.

Cheers

[Libertas]

What will get you closer to your goals?

What's your risk profile like?

I think the answer to this is a personal preference thing.

For me IO only works best because I'm growing my portfolio. I would pay P&I on the family home because this debt is not tax deductable.

I can see how one would prefer P&I on a rental property if they were only ever going to own 1 or 2 at the same time for the long term.

[rustica]

What will get you closer to your goals?

What's your risk profile like?

I think the answer to this is a personal preference thing.

ABSOLUTLY-DITTO

[RentMaster]

What will get you closer to your goals?

What's your risk profile like?

I think the answer to this is a personal preference thing.

I also agree. What works for one person might not be the best option for another person. For me I chose to completely pay off one of my mortgages while the others were left to pay off slowly on P&I. Does wonders for the cashflow as one properties rent is almost all profit now.

[Kay]

I agree with Aka G that when you have an established property portfolio and start to accrue extra funds, either buy another PI or think about 'retiring' from full-time work. A good ultimate goal is to live on your income, while keeping 50% equity. That is a nice stable situation to aim for, and you still get the tax benefits.
Kay

[Rolf]

I also agree that it depends on the personal situation.
At the moment I direct all excess funds towards the PPOR loan, and when that is paid off I will continue paying off IP loans only if I need to decrease expences further in order to drop full time work.
I may also leave IP loans on I/O depending on how my situation is at that time, it's hard to predict.

[Glenn]

As well as the feel good factor of not having to pay the mortgage every month, after paying it off, there is a mathmatical way to express the feeling.
Having unallocated money coming in (earnings) is king when seeking more borrowings from the bank.
As for the so called tax saving by having a morgage, that is bunk. There are no tax advantages in having a mortgage. Paying less tax is related to earning less money. I want my tax to grow.

[krispedersen]

Glenn,

While I know where you are coming from, surely your overall position (equity / cashflow) can grow faster by actually increasing your portfolio rather than paying it off. (As long as you are maintaining a reasonable LVR)

So while you are stating that you would rather pay more tax because you see that as making more of a profit you may be slowing down your overall growth because you're minimising your leverage.

I think you'll find that if you want to speak from a 'mathematical' point of view the best option would actually be to have a higher lvr with more property which will minimise tax and increase the potential to benefit from capital gains and mid/long term cashflow

However from an emotional / being able to sleep at night point of view, SOME people are better to just pay down their mortgages

I will qualify again what i've stated by trying to maintain a reasonable LVR (<80%) so you can continue to get the required finance to grow

Cheers