Ask Paul: My dad says I should pay off my mortgage early

Hi Paul,

I'm 23 years old and in a very privileged position. I bought an investment property in Queensland last year and currently live at home with my parents in Sydney, where I am fortunate to pay only $50 a week in rent. 

My income is $95,000 a year, with rental income of about $33,000 and about $2000 from investment returns.

My father is always at me to pay down my loan in order to get more equity in my property. However, I can't help but think I am losing out on my opportunity in the sharemarket. 

I allocate $1000 a month to shares, and was wondering if I should follow my father's advice or keep investing that $1000 a month.

I also have an offset account with $10,000 in it. If you were to say that I should put more towards the property, should I keep this in the offset or pay down the principle? 

The only debt I have other than my mortgage is HECS, which is currently sitting at $23,000. - Maria

Goodness, Maria, you have financial maturity way beyond your years.

In fact, I am embarrassed when I look back at myself at age 23: my total assets were an ancient Datsun 1000 worth $300 and a pushbike.

I had just started work and I think my savings plans were non-existent. Things got a bit better as I reached my late 20s, but it took a while.

I much prefer your approach, though. The key to financial security, which you obviously know, is to spend less than you earn, invest your surplus income and let compound returns work for you.

With investment property income, share income, a job and low expenses, you are in a solid position.

This is important, as it seems to me that repaying your loan on your investment property is not a priority. The interest you pay is deductible against your rental income.

So, the real question is: where are your best returns? I'll have to guess a bit, but if your mortgage interest was 6%, after tax deductibility, it would cost you about 4%.

If you invest in shares rather than pay into your mortgage, would shares return you more than 4%? The answer (in the long term, historically) is yes.

Obviously, paying down the mortgage is a super safe option, but if you do this, I would strongly argue for adding to the offset account. This gives you flexibility and access to cash for the future.

So, this decision is a risk call. Repaying debt is always safe, but at your age, with good income and a growing asset base, you might think that building your share portfolio while leaving a sensible level of debt on your investment property is a pretty good thing.

None of us is very fond of inflation, but it does destroy the real value of debt over time.

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