Posted by: Rhys Dyer | 2014/10/03 07:46
The answer to this question depends on the return you can achieve on your share investments, relative to the interest cost associated with paying down your bond, and your individual tax position.
Importantly, the interest that you pay on your home loan is not tax deductible, so by reducing your home loan, you are effectively getting a return equivalent to your home loans interest rate and it is tax free, because you are not actually earning it, you are saving yourself from paying it.
As a simple calculation, if you take the tax rate you are paying on your earnings and deduct that from 100. Divide this result into your home loan interest rate and multiply by 100, you will get a rough idea of the investment return you would need to earn to be equivalent to paying down your home loan. So, for example, if your tax rate is 40%, and your home loan interest rate is 9%, divide 9% by 60 and multiply by 100 and you get a result of 15%.
If you believe you can earn a sustainable 15% or greater return on your share investments, then better to stay in your share investment. If not, better to pay down your bond.
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