HOW TO TRANSFORM YOUR MORTGAGE

With interest rates so low, it’s a good time to have a home loan. So why not further use it to your advantage?

THERE’S no denying investment returns on cash in the bank today are – as Roy and HG would eloquently put it – a bucket of slop.

Banks are cutting deposit account interest rates closer to zero, which means after tax and inflation, almost every depositor is effectively losing money on their cash savings.

But the record-low interest rates behind these terrible cash returns have been great for Australians with mortgages, helping people pay big chunks off their home loans.

And they can deliver a double bonus – anyone with extra equity in their homes can use it to build their wealth further. Whether it’s an investment property or starting a share portfolio, the long-term returns should make it worth their while.

Turning a mortgage into an investment tool is easy. Borrowers can often use redraw facilities to access cash for investment, or take out a separate investment loan using their existing equity as security for the new mortgage.

I’ve done this for both property and share investments in the past, and it works.

But be prepared for potential short-term falls and scary volatility, because any investment other than cash will carry risk. However, this can be controlled by investing for the long-term and diversifying your assets.

PROPERTY

The most popular investment use of home equity among Australians is to help them become a landlord, with their equity replacing the need to stump up any cash for an investment property deposit.

Soaring house prices make this trickier than usual – because buying during a boom is less attractive than buying soon before a boom – but it can still be done and there are still forecasts of solid price growth ahead.

If you hold for seven to 10 years, it’s likely you’ll make money regardless, as long as you choose a good location.

SHAREMARKET

Many shares are paying dividends with an income yield of 4-6 per cent – that’s at least four times the rate on bank deposits and twice as much as loan repayments.

This means if you borrow money through your existing mortgage to buy shares, the dividends alone will more than cover the borrowing costs, so they’re profitable from day one. But, of course, there’s risk in losing your money if markets plunge and you sell your shares. That’s why using a home loan to buy shares should only be done if your investment time frame is at least seven years.

And make sure you can sleep peacefully at night if the sharemarket value drops at least 30 per cent, as it has been liable to do several times in the past.

START SMALL

Homeowners can also use money from their mortgage to invest in a wide range of other assets, including overseas shares, specific investment platforms that specialise in exchange traded funds and even cryptocurrencies, such as bitcoin.

But don’t strain yourself financially, especially when it comes to riskier assets such as cryptocurrency that can halve in value in only a few months.

If you want to take a punt like this, only invest with relatively small amounts, because the last thing you want to do is put your house and home loan at risk.