When it comes to property, there is no one right way of doing things. After a few years of property ownership, homeowners will often think about what they should do with the equity they’ve built up. In particular, they often consider expanding their property portfolio.
However, that thought bubble often appears as they are trying to pay down their mortgage on their home. Both options have their own set of advantages and disadvantages, and the decision ultimately depends on your personal financial goals and risk tolerance.
Here are the pros and cons of both paths.
Paying off your mortgage:
Pros
Debt freedom: One of the biggest benefits of paying off your mortgage early is the peace of mind that comes with being debt-free. It eliminates the financial burden of monthly mortgage payments and provides a sense of financial security.
Increased equity: Paying off your home loan reduces your mortgage debt and increases the equity you have in your property. This can be especially valuable if you plan to downsize or sell your home in the future.
Lower financial stress: Without the pressure of mortgage payments, you’ll have more disposable income to allocate to other investments or expenses, reducing financial stress.
Cons
Tied-up capital: Paying off your mortgage requires a substantial amount of capital. This capital could potentially be invested in higher-return opportunities, such as additional investment properties or other assets.
Reduced liquidity: By allocating a significant portion of your savings to pay off your mortgage, you may limit your ability to seize investment opportunities or handle unexpected expenses.
Higher borrowing costs: If you decide to borrow against a property that’s already paid off in the future, you might encounter higher borrowing costs, as interest rates can fluctuate.
Buying an investment property:
Pros
Income generation: Investment properties can provide rental income, offering a steady stream of cash flow to supplement your income.
Tax benefits: There are potential tax advantages associated with investment properties, including deductions for mortgage interest, property taxes and depreciation, which can reduce your overall tax liability.
Portfolio diversification: Owning multiple investment properties can diversify your investment portfolio, spreading risk and potentially increasing your overall returns.
Cons
Landlord responsibilities: Becoming a landlord entails significant responsibilities, including property maintenance, tenant management and legal obligations. It can be time-consuming and stressful.
Market risk: The real estate market is subject to fluctuations and there’s no guarantee that your investment property will appreciate in value. Conduct thorough research before purchasing to mitigate this risk.
Vacancy risk: Investment properties may experience periods of vacancy, leading to a loss of rental income. This can strain your finances, especially if you rely heavily on rental income.