Paying Down Debt vs Investing in Property: Which is Right for You?

Should you pay down debt or invest in additional properties? Both options have their own advantages, and the best path depends on your financial situation, goals, and risk tolerance. To help you determine the right approach, here are some key factors to consider before making a decision.

Interest Rates and Types of Debt

Interest rates play a critical role in managing debt. For example, high-interest debts, such as credit card balances, can quickly grow if not addressed. Because of this, it’s crucial to prioritise paying down high-interest debt or seek lower-rate alternatives.

Risk Tolerance

Your risk tolerance significantly impacts your investment strategy. If you're comfortable with higher risk, you may have the opportunity to yield greater returns, but this comes with uncertainty. Since past performance doesn’t guarantee future success, it’s always wise to seek professional advice before making significant financial decisions.

Financial Goals

Your financial goals should drive your decision-making. Whether it’s buying a coffee or investing in property, every financial choice affects your overall strategy.

• If your priority is to become debt-free, investing instead of repaying debt may not be the right move.

• If your goal is to generate passive income, strategic investments may align better with your objectives.

Understanding your short-term and long-term financial priorities will help you make a more informed choice.

Tax Considerations

Tax implications are another important factor. For example, tax-deductible expenses on investment properties or lower after-tax interest rates can influence your decision. Additionally, capital gains tax should be factored into your investment plans, particularly if you intend to sell properties in the future.

The 6% Rule

The 6% rule suggests that if you have debt with an interest rate of 6% or higher, you should prioritise paying it off before investing. However, if your interest rate is below 6%, you may be better off investing your extra money, as the potential returns from investments could outweigh the benefits of early debt repayment.

Building a Solid Financial Base

Before investing, it’s crucial to establish a strong financial foundation. This includes:

• Making minimum payments on all debts

• Building an emergency fund

• Maximising employer superannuation contributions

• Paying off high-interest credit card debt

A stable financial base ensures you are in a secure position before making investment decisions.

Benefits of Paying Down Debt

Choosing to pay off debt has several advantages:

• Cost savings – Reducing high-interest debt saves you money over time.

• Credit health – Lower debt levels can improve your credit score, making it easier to secure future loans.

• Financial peace of mind – Debt can be stressful. Paying it down can alleviate anxiety and give you more financial flexibility.

Benefits of Investing

Investing instead of paying down debt can also be a smart strategy, particularly if your expected returns outweigh your debt interest rate.

For example, if your mortgage interest rate is 5%, but your investment portfolio yields 10%, investing may be the more profitable option.

Can You Do Both?

If both options appeal to you, you may not have to choose just one.

Investing while paying down debt can be an effective strategy, provided your debt levels are manageable. However, if you are struggling with significant outstanding debt, it is often best to prioritise repayment before making investment moves.

Final Thoughts

Deciding between paying down debt and investing requires careful consideration of your financial situation, risk tolerance, and long-term goals. Our experienced team can help you clarify your financial objectives, create a tailored plan, and guide you towards financial stability. Contact us today to get started.