How can we clear our $500,000 mortgage in five years time?

We’re 50 and want our $502,000 mortgage cleared by 55. Our wages and investment income put us both in the top tax bracket. We already make extra repayments, but to achieve our goal we are considering using a $50,000 work bonus, plus selling $100,000 of shares (CGT likely under $8000) to reduce the 6.3 per cent mortgage. Is selling growth assets to secure a “guaranteed” 6.3 per cent return by becoming debt-free a smart move – or are we being too conservative?

A great goal to set yourself. If you have the risk appetite, the optimal scenario here would probably be to get the mortgage paid down, then re-borrow against your home and buy growth assets again.

That way the new debt will be tax-deductible, significantly reducing the cost of money for you. Capital gains tax is an important consideration, but the figures you’ve given here suggest it is not too harsh.

There is no way of knowing what the future returns will be for the shares that you are selling, and so there is no definitive way to decide which path is best. Clearing your mortgage provides a guaranteed saving regarding interest expense, as you have identified, plus the peace of mind and added flexibility that comes with owning the roof over your head debt free.

Following the recent unexpected death of our financial planner, we’ve been assigned to another adviser who we haven’t met. Is this the normal process? After a 20+ year working relationship, a lot of trust was built, and to now just be handed over to a stranger is causing me a lot of stress.

Yes, I can certainly understand why that would be unsettling. This process will have occurred to ensure you always have someone you can contact if you need assistance. You are not locked into continuing to work with the new adviser, however I would think there is value in at least having access to someone should you need it.

Reach out to the new adviser and arrange a meeting. Sit down with them and decide whether you feel comfortable maintaining a working relationship. If not, you are quite free to move to a new adviser. Perhaps this presents a good opportunity to review your needs and shop around.

Can you please explain negative gearing? It’s a term I see come up quite a lot, but I’m not sure if I quite understand it.

Thanks for your question, I’m sure you are not alone. Gearing means using borrowed money to invest. It’s sometimes also referred to as leverage. Gears, levers, hopefully you can see the connection.

The point is to increase investment exposure to boost returns. Of course, it also increases risk, but risk is what produces returns, so for some, increasing their level of risk is precisely the point.

Investments produce returns in two ways – income and capital appreciation. The money borrowed to enable the investment will have an interest expense, and if the investment is a property, there will be other expenses like council rates and maintenance. You therefore have money flowing in, and money flowing out. Negative gearing means the money flowing out exceeds the money coming in.

Now you may ask why anyone would undertake such an investment, isn’t it losing money? They do so with the expectation that the capital appreciation the investment produces will exceed the income loss. That’s not assured of course, but that’s where the risk comes in, and as mentioned, it is risk that produces return.

Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the Financial Autonomy podcast. Questions to: paul@financialautonomy.com.au

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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