Bond originator

question

Posted by: Micha | 2014/10/01 11:08

We have enough money invested in shares. Should we sell them and settle our bond?

My wife and I bought our first property a year ago. We live in the property and have been making regular payments on top of the mandatory monthly installments. We have enough money invested in shares to pay off our bond. Should we sell our shares and settle the bond?

expert answer

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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user comments

Posted by: ASC | 2014/10/07 16:27
If the nett acquisition amount, post the cash-out of your shares equates to, say, 80% of your current loan amount, why not cash that out and inject 50% of it into your existing bond and the remaining 50% as a deposit for a second property. In that way you will effectively pay one full bond amount, since 50% of both bonds will be paid for already. Then, rent out the new property and use that income to distribute evenly into each of the two bonds, such that you can maintain relatively even debt decrease on both bonds ?? Remember, that your property will rise in value, probably greater than that of your shares, and your interest saved will be high. So, what you need to focus on is slightly longer term - [Interest saved on bonds through lumpsum payments] + Percentage property increase over time. . .
Reply to ASC
Posted by: Chris | 2014/10/07 21:39
Shares(Unit trusts) can out perform a second property. Stay is shares!
Posted by: Anonymous | 2014/10/07 07:24
The above calculation assumes that the investment return will be taxed fully as income, in the case of shares that is not held for trading this is not the case as you would likely be taxed as capital gains, so your taxes on your capital gains would be 33.3% of 40% which is 13.32%, so if your homeloan interest is 9% you would need a return of 10.38% to be better off.
Reply to Anonymous

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