When setting financial goals that revolve around building wealth, we generally see clients tossing up between a few different options. These usually include paying off their mortgage, investing, or recycle debt in a high interest rate environment.
If you’re curious about the best way to build wealth that aligns with your financial goals – especially when interest rates are high – read on.
What is the best option for me?
When it comes to the best wealth-building option when interest rates are high (note: ‘high’ means something different to everyone), you’ll first need to consider your short, medium, and long-term financial goals. Here are some typical wealth-building strategies we assist our clients with.Paying off your mortgage
When it comes to your mortgage, paying off your home loan in a high-interest rate environment means you’re earning a higher return on your money while paying down debt. While an interest rate of 2-3 per cent is nice, you’ll save much more when putting down money on a 5-6 per cent loan. When you pay down the debt on your mortgage, you know where the money is going—when your money goes in, the balance goes down, and you get closer to financial freedom.Investing
When interest rates go up, ‘safe’ options like cash and bonds can appear more tempting. Even so, higher interest rates haven’t overtaken the appeal of paying down your mortgage sooner. However, investments outperforming the average mortgage rate are not a given, so this uncertainty is worth taking into account. Investing can be a good strategy if it aligns with your financial goals. Looking at it from a long-term perspective though, it’s unlikely your expected returns will be significantly different over time. The market and its returns are prone to change, so it’s common to see a fluctuation in your investments.Debt recycling
The third option, if you’re adept at managing your money and can deal with a little more complexity, is the practice of debt recycling. Debt recycling is a way to reduce your personal debt against your house and then use the equity in that house to recreate the debt and invest the money. As the name suggests, you’re recycling your debt from personal (non-tax-deductible) debt to investment (tax-deductible) debt. Step by step, debt recycling will look a little like this: Step 1: Access the equity in your home Step 2: Borrow against your home Step 3: Wait for the gains Step 4: Embrace the cycle There are plenty of other benefits stemming from debt recycling. These include building your investment portfolio, potential tax benefits, a passive income and the opportunity to pay off your mortgage faster. To learn more about debt recycling, read our blog. With higher interest rates, debt recycling is becoming an increasingly popular option. For example:
