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What happens when you pay off your mortgage?
Find out what to do after you've paid your mortgage in full, and where to invest your money next.
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So after many years of financial discipline you’ve finally paid off your mortgage. Congratulations! Owning your home outright is a huge achievement. And now that you've paid it off, you have a many more places to put your money and grow your personal wealth. You can save or invest your money in many ways. Finding the right choice for you depends on your financial goals and your appetite for risk.
Discharging your mortgage
Once you've paid your home loan in full, you'll need to discharge your mortgage. A discharge is the process of formally removing your lender from your Certificate of Title. It's an important process to follow, and will save you from complications if you ever plan to sell your home.
The first step in discharging your home loan is notifying your lender. They'll provide you a document known as a Discharge Authority Form. Complete and return this form, and then register your Discharge of Mortgage at the Land Titles office in your state or territory.
Investing your money
Now that you no longer have a home loan repayment hanging over your head, you'll have money freed up for other purposes. You could take a holiday, splurge on something you've always wanted or undertake some renovations. Or, you could invest your money elsewhere and try to grow your wealth. Here are a few of the asset classes you might consider.
Investing in shares
Trading shares allows you to become a part-owner of a company. As shares in a company are traded on the stock market, the price of shares fluctuates up and down. Investing your money in shares involves buying stock in one or more companies. There are two main ways to make money from shares:
- Buying shares when they are priced low and selling them when the share price increases
- Through regular dividend payments, which are payments companies make to shareholders to allow them to share in the company profits
Shares can also be referred to as stocks, equities or securities. You can invest in shares traded on the Australian Stock Exchange (ASX) or international shares traded on stock exchanges around the world. There are a variety of ways to invest in shares. You can buy and sell through share trading platforms such as IG Share Trading, HalifaxOnline or FP Markets. Alternatively, you could use the services of a financial planner or stock broker.
Benefits and risks of investing in shares
The biggest benefit of investing in shares is that there is a strong potential for long-term capital gains. It’s also possible to make large short-term gains on the share market, but this involves taking on a much higher level of risk. Other benefits of shares are that dividends can be used to create a regular source of income, while you can trade shares from the comfort of your own home through an online share trading platform.
However, shares certainly aren’t guaranteed to turn a profit, and shares in a company can experience dramatic price drops – even to zero. The value of your shares can also fluctuate from one day to the next, while the dividends you receive can also rise and fall.
Investing in shares may only be suited to experienced investors so consider seeking advice before going ahead with this strategy.
Investing in property
The property market has delivered lucrative returns for many Australian property investors over the years. Investing in property involves buying a property at an affordable price and then renting it out to generate rental income. Once the value of the property has risen to a suitable level, the investor can then sell the property for a capital gain.
There are a variety of ways you can invest in property. You could choose to buy a property to rent out to generate cash flow, or you could try to buy and sell for capital gain. You could choose to invest in a Real Estate Investment Trust, or REIT. REITs pool investors' money to invest in various properties, and often trade on the ASX. There is also a growing trend of investing in real estate through crowdfunding. This burgeoning model allows investors to own a portion of a property or properties, and to make returns based on their fraction of ownership.
Benefits and risks of investing in property
As a general rule, property can be less volatile than shares and some other asset classes. If you do your due diligence and purchase a property in the right location, there’s potential for substantial capital growth, while the chance to take advantage of rental income is another bonus.
However, there’s the risk that the value of the property goes down rather than up, as well as the fact that you need to consider extra costs such as mortgage repayments, stamp duty and property maintenance fees. It’s not possible to just sell off part of your property investment if you need quick access to cash, while entry costs to get started in the property market are also quite high.
Investing in business
Another option you might want to consider is investing your money in a business. Rather than investing in shares, which involves buying a small portion of a publicly listed company, this refers to taking ownership of a business and using it to generate wealth.
Benefits and risks of investing in business
If you set up a well-run business in the right industry at the right time, you could enjoy substantial returns. Businesses also give you the chance to pursue your creative pursuits and achieve a level of personal fulfilment that most other investments don’t satisfy.
However, running a business is risky, especially if you’ve never done it before. There’s a risk that the business will go bust, while you’ll also need to be very hands-on when managing your investment and this may take a lot of time and effort.
Investing in super
Superannuation is a way to save for your retirement. Contributions can be made into your superannuation fund by your employer and topped up by contributions from your own bank account. While these contributions accumulate, your super balance is also invested by your super fund to help boost your retirement savings.
Benefits and risks of investing in super
Investing can be a viable way to save for your retirement. Not only can it ensure that you are able to live comfortably once you stop working, but money you put into super is usually taxed at a lower rate than money you put into other investments.
However, while investing in superannuation can lead to a steady growth in retirement savings, it doesn’t offer the same potential for large returns that other investment options do. Super is also affected by fluctuations in investment markets, so there’s always the risk that you won’t achieve the returns you desire.
Investing in high-interest savings accounts
High-interest savings accounts are a simple but effective investment solution. In a nutshell, you make regular contributions to an online savings account, and you earn a high rate of interest on your savings balance.
Benefits and risks of investing in high-interest savings accounts
High-interest savings accounts are easy to establish and maintain, and they offer secure and regular investment returns. If you make a habit of regularly putting some of your income towards this type of account, your savings will grow. Some accounts also offer a bonus introductory interest rate to help you build a savings balance even quicker.
However, some banks offer interest rates on a tiered balance so higher amounts earn a lower rate of interest, while it can sometimes take a little while to withdraw funds from your account – not ideal if you need fast access to your money.
Investing in term deposits
Similar to a high-interest savings account, a term deposit lets you earn a high rate of interest on your savings balance. However, the difference is that the money is invested for a fixed time period, for example one year, and your interest rate is locked in until your term deposit matures.
Benefits and risks of investing in term deposits
The main benefit of a term deposit is that it guarantees steady and secure returns. While there may be opportunities to grow your wealth more substantially elsewhere, term deposits offer a safe and reliable investment solution. And if interest rates are high at any particular time, you can lock in a rate before they start to drop.
On the other hand, term deposits don’t allow you to access your funds until the account matures – so if you have a cash flow problem, your money will be locked away. The other main risk is that interest rates could rise well before your deposit matures, meaning your money won’t be working as hard as it could be.
Investing in managed funds
A managed fund lets you combine your money with other investors. The resulting funds are then used to buy and sell shares and other assets by an investment manager, and you periodically receive income or distributions from your investment. Another option is to buy and sell Exchange Traded Funds (ETFs) on the ASX. Another option is to invest in an indexed fund. This is a type of managed fund that is constructed to track a component of the ASX.
Benefits and risks of investing in managed funds
Managed funds give you the security of having a professional manage your investments, while they also allow you to diversify your investments across a broad range of assets. However, handing over control of your investment can be a downside for some, while higher fees also tend to apply to managed funds than to some other investments.
Investing in Forex
Forex is an abbreviation of foreign exchange, and forex trading involves trading currencies on the foreign exchange market. Forex traders aim to predict how the value of currencies will fluctuate, and then make money on the rise or fall in value of one currency relative to another.
Benefits and risks of investing in forex
The global forex market runs 24 hours a day (but not on the weekend), allowing you to place trades whenever suits. As forex is a leveraged market, you can start trading currency with only a small initial outlay of money and there is the potential for substantial returns.
The downsides, however, are that forex trading is quite complicated and best left to experienced investors, and that you can end up losing much more than the amount you initially invest.
Investing in CFDs
A CFD is a Contract For Difference, and it is based on the value of an underlying asset, for example shares in a company or a currency pair. While you never own the underlying asset, you trade CFDs based on your belief that the short-term value of the asset will either rise or fall.
Benefits and risks of investing in CFDs
CFDs only require you to invest a small margin and offer the potential for substantial returns. There are also online CFD trading platforms that allow you to manage your investment from home.
However, investing in CFDs is complicated and risky, and there is the potential to lose much more than the money you invest.
Choosing the right investment option
The right investment option for you comes down to your goals. Are you looking to grow your wealth substantially in the next five to ten years? Do you want to start steadily and securely putting money away for your retirement? Do you want to be able to set your family up financially long after you’ve passed away? How much risk are you willing to take on? Are you happy to borrow more money to fund the investment or would you rather pay for it out of your own pocket? Answering these questions will help you determine which investment option is right for you.
For example, if you’re willing to accept a certain level of risk in exchange for high potential returns, investing in shares could be a good solution. If you just want to set yourself up for a secure retirement, however, look at the steps you can take to boost your super balance.
The other main factor that will influence your investment decision is your budget, as you need to choose an investment option you can comfortably afford. As an example, while investing in property requires a substantial outlay of funds, making regular contributions to a high-interest savings account is much more affordable.
Accessing cash through redraw
If you haven’t yet finished paying off your home loan, it may be worth considering holding off paying out your mortgage. As you will have a substantial amount of equity in your home, if you’ve made additional repayments towards your home loan you may be able to access those extra funds through the loan’s redraw facility.
Many lenders offer home loans with fee-free redraw facilities, so you can use this option to enjoy quick and easy access to a substantial amount of cash. You can then invest that cash however you wish.
This may work out to be a cheaper option than borrowing further money to invest in the future, and the interest payments required on your outstanding loan amount should be minimal. Ask your financial planner for advice on whether this could be a viable option for you.
Traps to avoid when investing
While we’ve explored some of the specific risks associated with each investment option above, there are a few more general risks you should be wary of. These include:
- Taking on more debt. If you’ve just paid off your mortgage, ask yourself if you really want to tie yourself down to another debt. The financial and emotional stress of keeping up with repayments can wear you down, so you might be better off avoiding borrowing more money.
- Getting into trouble. Depending on your circumstances, you don’t want to take on too much investment risk. You’re obviously going to be much closer to retirement than you were when you first took out a mortgage, so consider the potential consequences for your finances if your new investment plans go belly-up.
- Putting the house at risk. You’ve worked for years to pay off your house and make it your own, so think very, very carefully about any investment options that might put your home at risk.
- Expecting a silver bullet. Remember that there are no guaranteed pathways to instant wealth no matter which option you choose. If an investment sounds too good to be true, it probably is.
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