SEP 13 2019
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SEP 13 2019
All Posts

The best deal in town!

Posted by: Henry Ford in opinion

If you were offered an absolute risk-free pretax return of 6.7% would you think it was a good deal? 

Well, the risk-free rate in New Zealand is somewhere around 1.5% so getting 6.7% for the same level of risk seems like a good idea.

For anyone who has a mortgage and who is on a 33-cents in the dollar tax rate, then that deal is available at the stroke of a pen. Paying off your home loan is one of the most under-rated investment choices there is. With interest rates so low the motivation to pay down debt seems less. However, this may be just the time to pay down debt because interest rates may not always be this low, and with less interest to pay there is more money to pay down debt. And it’s the best deal in town!

So why is this such a good investment? First it is risk free. Once the debt is repaid, there is an absolute certainty that there will be no requirement to pay the interest on that debt. 

Let’s say the home loan has an interest rate of 4.5%. Remember, the money that pays the 4.5% comes from tax paid income, so on top of the 4.5% you have to earn your tax rate. Let’s say that tax rate is 33-cents in the dollar. That means your gross income committed to pay that interest is 4.5% plus 33-cents in the dollar tax, 2.22%, to total 6.72%. That’s your risk-free return!

Actually, it goes further. If you have a home loan, you have probably taken life insurance so that if something happened to you, your family would still have a roof over their heads. Guess what, lowering your home loan lowers the need for insurance, which lowers the premiums you have to pay, which makes your investment even better!

The best thing of all is that this deal is available for everyone with a loan of any sort. 

It’s the best deal in town!!

Henry Ford is an Authorised Financial Adviser and Director of Rutherford Rede Limited. He specialises in helping clients who need assistance in managing the financial consequences of changes in their lives. A Disclosure Statement is available, on request and free of charge.

Tags: Money Week,

If you were offered an absolute risk-free pretax return of 6.7% would you think it was a good deal? 

Well, the risk-free rate in New Zealand is somewhere around 1.5% so getting 6.7% for the same level of risk seems like a good idea.

For anyone who has a mortgage and who is on a 33-cents in the dollar tax rate, then that deal is available at the stroke of a pen. Paying off your home loan is one of the most under-rated investment choices there is. With interest rates so low the motivation to pay down debt seems less. However, this may be just the time to pay down debt because interest rates may not always be this low, and with less interest to pay there is more money to pay down debt. And it’s the best deal in town!

So why is this such a good investment? First it is risk free. Once the debt is repaid, there is an absolute certainty that there will be no requirement to pay the interest on that debt. 

Let’s say the home loan has an interest rate of 4.5%. Remember, the money that pays the 4.5% comes from tax paid income, so on top of the 4.5% you have to earn your tax rate. Let’s say that tax rate is 33-cents in the dollar. That means your gross income committed to pay that interest is 4.5% plus 33-cents in the dollar tax, 2.22%, to total 6.72%. That’s your risk-free return!

Actually, it goes further. If you have a home loan, you have probably taken life insurance so that if something happened to you, your family would still have a roof over their heads. Guess what, lowering your home loan lowers the need for insurance, which lowers the premiums you have to pay, which makes your investment even better!

The best thing of all is that this deal is available for everyone with a loan of any sort. 

It’s the best deal in town!!

Henry Ford is an Authorised Financial Adviser and Director of Rutherford Rede Limited. He specialises in helping clients who need assistance in managing the financial consequences of changes in their lives. A Disclosure Statement is available, on request and free of charge.

Tags: Money Week,

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