Remember more debt means more risk
Cath could top up super or buy another property but ...
QI’ma 49-year-old female earning $113,000. I work for the federal government and contribute 10% to the PSS scheme. I currently have $510,000 in super. I had more but I lost $158,000 when I got divorced. My house is worth $750,000, I owe $290,000 and I have $41,000 in savings. My house is currently rented out at $600 a week, as I have been working overseas. My repayments are interest-only to reduce my taxable income and I have no other debt.
I will return home soon and I find myself completely independent for the first time in many years. I have been thinking of buying an investment property. However, I worry about being able to manage two mortgages on my own if the property has periods with no rental income.
Am I in a good position to invest in another property, or should I add more to my super?
At 49, Cath, you are in a really solid financial position. You are on a good salary, are topping up your super and own a valuable property. The real decision for you now really depends on your attitude to risk. Gearing accelerates wealth but destroys it if asset prices fall.
Gearing into another property is very realistic for you. With the equity in your home, along with your savings and a solid income, you are a most attractive customer for a lender. While it is critical that you do your own research, if you were to buy in a growth area with public transport, entertainment and so on, and providing you do not overborrow, I am pretty relaxed. Even if you had a period without a tenant, your good salary, with the security of a government job, does help to lower the risk of more debt.
On the other hand, topping up your super to the maximum level, which is now $25,000pa, is a low-risk way to create wealth. It would also save you plenty of tax thanks to the concessional nature of contributions to super and tax on investments in your fund.
Given you already have an excellent super balance and a home, I am broadly comfortable with either strategy. Clearly, more debt means more risk, with potentially greater upside. If in doubt, topping up your super and paying down your mortgage is a great option with low risk.