Paul’s verdict: The real issue is not money, but your kids’ education

Put the family first and let everything else follow that decision

Excellent question, Vivek. It’s a common dilemma. It’s also complex! Funnily enough, it’s not the money part that’s complicated. I know mortgage deductibility, capital gains tax and so on can be tricky, but these are not really the big issues here. So let’s deal with them first.

Whether you pay down your mortgage or buy an investment property is just about risk and return. Hopefully, you are not paying any more than 3.5% on your mortgage. If you are, shop around and change. But let’s use that for our base case. Any money you put into your mortgage should be into an offset account. First, it gives you access to your money when needed. Second, it means you are not paying down your mortgage. If you do turn your family home into an investment, you want the biggest loan on your current home, as the interest will be deductible if it becomes an investment property. You want the smallest possible loan on your new property because it will be non-deductible.

Now we return to the 3.5%. Every dollar you put into your offset account effectively earns 3.5%, but it does so pretty much risk free and tax free. For most taxpayers, that is equal to about 5% from an investment, as unless you can invest in a non-incomeearning partner’s name, you will pay tax on the return.

So the math is pretty simple. If you think you can earn 5% or more from any investment, it will produce a better outcome than paying down your mortgage.

But here’s the rub! Paying down your mortgage is virtually risk free. Any investments will have risk attached. Mind you, history shows that decent shares and well-located property are doing better on average than 5%pa over the long term, but taking on more risk is a personal issue that links to your income, assets and time frame.

On a technical level, I suspect you would do best financially by gearing up on a new investment property, having your kids in a government school and investing the $20,000 a year saved on school fees. But that is not what life is about. We work to provide security and give our family the best opportunities.

Again, this is personal. Many of my friends went to excellent private schools and are good citizens and have done well. A lot of us went to government schools and – guess what? – we are good citizens and have done well. But I feel education is critically important in these complex times. So if I were in your shoes my first focus would be on the best school for my kids. If that is private, fine. Make that decision first and then plan your next move into property.

If a particular government school is your preference, buy a house inside the school boundary and make it your home. The key thing is to put your family first and let your money follow the family decision. Obviously it would be better to have a bigger mortgage on the investment property, but the real issue here is giving your kids the best possible education.