Should You Pay Off Your Investment Property Mortgage?

by Lisa Dudson on Apr 01, 2014
Article appears under: Mortgages, Money Tips

This is a common question that property investors ask but it’s not a simple question to answer as it depends on your personal situation; however there are some guidelines that can help you make your decision.

Guideline One
If you have a mortgage on your personal home ideally you want to pay this off first. The reason for this is that you pay your personal mortgage with after tax money. So if the average mortgage interest rate is say 7.5% over a 20 year period this is equivalent to an approximate 10% investment return before tax (assuming an average personal tax rate of 25%). Unless you are an aggressive investor then it’s unlikely that you will get a better financial return than paying off your mortgage; therefore use all the funds you can to pay off your home mortgage first and keep your investment property mortgage on Interest Only.

Guideline Two
Let’s say you do a budget and find that you have some spare cash each month, maybe $500 to $1,000. In a perfect world you would put this extra money on your home mortgage; however do you think you would, or would you spend it? In my experience it is a lot more likely that the money will get absorbed into your ‘living’ expenses. You could then argue that it’s a discipline issue. In those cases it might be a good idea to make your investment property mortgage Principal & Interest as it will force you to put the extra money onto your mortgage and doesn’t rely on your self-discipline.

Guideline Three
If you are building a property portfolio and need to stay in the best borrowing position to purchase future properties then having your investment mortgages on Interest Only means your cash position is stronger than if you were paying Principal & Interest. This is because your outgoings are lower as you are not yet paying off the mortgage.

Guideline Four
Of course if your investment property mortgage is paid off you have more equity than if you had a mortgage, so from that perspective it makes a lot of sense to pay them off over the long term.

In summary, it’s a good idea to put all your spare cash towards paying off your own personal house mortgage first and then make your long term objective to pay off all your mortgages. Many property investors keep their mortgages on Interest Only because it ‘costs’ them less and it creates a better tax position because it keeps their costs high. The trick is to balance this with the long term benefits of more equity.