Ask Paul: What's next - shares, cash or investment property?


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Q. My husband and I earn a combined $130,000pa and we owe $70,000 on our home loan.

We have no other loans and no children. We also have no foreseeable big costs coming up, apart from maybe another car in the next year or two.

We are hoping to travel and work around Australia indefinitely in a few years.

With just $70,000 left on their mortgage, should Alicia and her husband buy an investment property, invest in shares or stockpile cash for the future?

We are in our early 40s now.

Our question is, after paying off the home loan, should we invest in another property or shares, or save our cash for our future?

We currently have no savings, as all our extra cash is going into the home loan, but we can redraw if needed. - Alicia

A. You are making great progress on your mortgage, Alicia, and using an offset account to access your cash if needed is a great idea.

No doubt you are also building up super via employer contributions.

Once the mortgage is fully offset, or before that if you prefer, you have plenty of positive options. With interest rates dropping and at historic lows, the option of buying an investment property in this market downturn is an interesting one.

Property is a pretty easy asset to understand. Its value is driven by supply and demand.

A growing population in most parts of Australia adds to demand, and providing people have access to reasonably paid jobs the future for property values looks positive.

This is a classic risk-and-return scenario. Adding to your offset account is pretty much risk free.

The return you get is effectively the interest rate on your mortgage, which should be under 4%. That is a pretty nice return with no risk. So paying off your mortgage makes a lot of sense. If you were to buy an investment property now, you would want to be confident it would do better than 4% a year for you.

This is a personal choice and I'll leave that with you.

But I do like your plan to pay off your home, buying a well-located investment property is fine and I would like you to ensure you are in a good, low-cost super fund. That will add investments such as local and international shares to your mix.

As the decades go by, if you own your home, have a good amount in super and another investment such as a good property, then financial freedom is in your grasp.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Click here to ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.