When should I start with this strategy?
You will be able to start this strategy as soon you as you have built up a reasonable equity buffer in your home and, hopefully, before the children are born. Advice is important. You will need to contact an adviser who will be able to assist you in this situation.
Make sure the adviser is a licensed adviser who is able to provide you with the right outcome for this strategy. You will also need to carry out the same steps as before with your adviser in terms of your investment plan. Again, as with any loan, don’t over extend yourself.
The cost
The funds you have borrowed against your equity should also receive a very competitive interest rate from your bank or financial institution. Consider an interest only loan, and there are plenty of banks and lending institutions that would welcome your business. I am certain the financial institution which has your current home loan would not want to miss out on lending more money to you.
Regular saving
Once again, ‘drip-feeding’ the regular purchasing of your investments into the market may be a smarter approach and is essentially dollar cost averaging. Discipline is essential as with all investments strategies. Again, any income derived from the franking credits needs to be paid back into the home loan and not into other places such as your wallet.
Over time, as the balance reduces on your home loan and hence more equity is created, you can keep adding this new equity to your investment portfolio. Can you see now the process working and how we are switching bad debt into good debt?
Be patient as this strategy becomes effective after a number of years as your income is increasing and the growth of your portfolio is also moving upwards. As you keep lowering the mortgage, you then continue to draw out more equity to invest in a portfolio of managed funds or shares. It is important to keep adding to your investment portfolio on an annual basis by the same amount you are paying down each year on your home loan.
This strategy requires careful planning and structure. Financial planning advice may be required to be certain of your calculations—they need to be exact. You need to clearly understand the concept of borrowing from your home and the placing of these funds into an investment portfolio. The calculations are very important. Every dollar counts!
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