Ask Paul: Should we cash out investments to help pay down the mortgage?
My wife and I are in our late 30s and are expecting our second child shortly.
We want to undertake renovations in 18 to 24 months, which will likely cost $500,000. Our mortgage ($450,000), day care and usual household bills are our only outgoings. We were fortunate to lock in a three-year 1.75% interest rate deal last August.
We have about $50,000 in savings, $50,000 in ETFs and $50,000 in a Colonial fund - the investments have dropped in value by around 10%.
We have a standing order of $1000 a month into Colonial. With the forecast for the economy and interest rates, what do you think about withdrawing the investment funds now and stopping ongoing investment, to assist with paying down our mortgage?
Or do you think we should wait until we need it for the renovations? - James
Well, James, to be frank, your guess is as good as mine as to where markets will be in 18 to 24 months. But before we drag out the pretty flawed crystal ball, let's look at what we do know from the facts you have given me.
Well done on the 1.75% fixed mortgage rate - that will keep expenses nice and low for another couple of years. You are saving $1000 a month and you obviously manage your money well, as you have a pot of $150,000 in savings and shares.
With a second bub coming along, it may be that one or both of you see reduced family income for a period, plus additional costs. Here you need to add these issues to our list of facts.
A big one is: how secure are your jobs? If you told me they were secure and reasonably paid, I'd look at your relatively small mortgage, your savings and, in your shoes, I would keep saving and investing. But now we're talking about risk, and this is totally personal to you (and me).
With a 1.75% mortgage for a couple more years, the risk question is: will your investments outperform this number until you need to renovate?
The truth, of course, is we don't know. All I can do is set out information regarding your risk options and you need to decide.
Higher risk is leaving your investments alone and topping up by $1000 a month. Middle risk is leaving the investments as they are and adding the $1000 a month to your cash savings. Low risk is cashing up now, going to secure interest-earning investments, such as term deposits, and you have a certain path forward.
An argument leaning towards cash is that you can get interest of more than 3% on term deposits as rate rises come through. The issue with cash is that inflation is likely to be running at 8% by year's end, eating into your purchasing power. But will shares do better or worse over
18 to 24 months? Who knows!
Your call, but maybe a "mid strategy", where you hold investments but top up cash with savings, often known as sitting on the fence, is not that silly in these uncertain times.
All the best to you and your wife with a healthy birth for mum and the new bub. You guys are doing well with money at a young age - that will all work out fine if you stick to your strategy.
One of the few things I will guarantee is that health and happiness are absolutely everything. Money helps with life choices, but it is just money.
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