PROPERTY

Ask Paul: Should we sell an investment property to pay off our home?

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Q. My partner is 51 and earns $70,000 and has super of $200,000. I am 42 and earn $62,000 (I work at a not-for-profit and salary package $18,550), plus investment property income of $18,000 with superannuation of $160,000.

We bought our principal place of residence, now worth $725,000, three years ago. My partner has a mortgage of $190,000 with $20,000 in an offset account and I have a mortgage of $435,000 with $40,000 in the offset account. We make weekly repayments of $266 and $606 respectively and salary sacrifice $200 and $250 respectively each week into super.

I have two investment properties (both bought long before we met and purchased our own home): one worth $370,000 ($50,000 mortgage and $17,000 in offset) and the other worth $500,000 ($170,000 mortgage and $85,000 in offset).

Both investment loans are interest only and payments are monthly. I had mistakenly made a payment into a redraw account before moving to a new bank, so transferred this amount to an offset account. From what I understand, I can't use this to offset interest on the home loan. Also, all properties are units and are in Sydney.

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?

Should I sell one or both investment properties to pay off the home loan; use the money we are salary sacrificing into super to pay off our home loan; or invest in shares, even though we don't know much about them but would like to diversify?

We would both like to work part time at 60 - or not at all if we can afford it. - Chris

A. Sadly, Chris, you can't offset your home mortgage interest against income from investment properties. The big plus of your own home is that there is no capital gains tax if you sell, but the interest on your mortgage is not deductible.

Vicki has a decade before 60 and you have close to two decades, so the real issue is that you continue to save.

With a pretty decent property portfolio, Chris, I'd suggest you continue with interest only on the investment properties and I?like your strategy of adding to your offset account on your mortgage and topping up your superannuation via salary sacrifice.

At some stage, selling an apartment may make sense, but in the current property downturn I don't think this is the right time. Our big cities such as Sydney are seeing rapid population growth and over time I would argue this will see property prices recover.

The key for you both is to continue to save and invest. Clearing out your mortgage by the time you retire is a key goal. Your super, with employer contributions and your own top-ups, will benefit from compound returns over time. Your investment properties also should show growing rent and value. So with plenty of years to go, I think you are both tracking well.

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Paul Clitheroe AM is a respected financial adviser and Money's chairman and chief commentator. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section.
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