Ask Paul: Should we borrow against our house to buy shares?
We are in our early 50s, with two teens still living at home, and we have been paying down our mortgage while topping up our offset account as quickly as possible.
We have about $80,000 to go until we no longer pay interest. However, given interest rates continue to drop (ours is 3.59%) we wonder whether we should invest in indexed share funds instead.
We have $75,000 cashback available and $80,000 in the offset account.
Should we withdraw $50,000 or $100,000 to invest? Alternatively, would it be better to tap into our equity and obtain a loan or line of credit to also take advantage of tax deductions (we are both in the lowest tax bracket)? - Ang
You know, Ang, I am really conservative. So I hate the idea of borrowing against my house.
I accept it is technically a sensible idea. You borrow, at a low interest rate secured against your home, and invest.
As you say, interest in excess of income earned is tax deductible and you would certainly expect investments to outperform the interest costs.
It makes real technical sense. I am certainly not going to say don't do it, simply because it does make sense. For me it is more emotional than logical. I want my home to be "my castle", hence no debt against it. That decision I will leave to you.
But, yes, with rates this low, you are likely to do better investing outside your offset account.
This is riskier, but that is the nature of investment. We tend to get better long-term returns when we take risk.
I would not be against the idea of adding to a low-cost indexed share fund providing you take a long-term view and accept the need to hang on when markets do their regular nosedives.