Do you think your mortgage is evil? Maybe it's your best friend?

Is your mortgage evil?

Are your mortgages liabilities? That is, do you view them as negative things that you would like to eliminate if you had the money? If so, I challenge you to think of mortgages as an asset. In fact, doing so could dramatically improve your financial success.

In the olden days…

Decades ago, the clear majority of people viewed debt as a bad thing. If you had a loan you should repay it as soon as possible. But that’s incorrect. Some level of debt is actually good if it’s used to own appreciating assets. The amount depends on your stage of life. If you are retired or close to it, you probably should have a lower level of debt (and almost certainly no non-deductible debt). However, if you are a few decades away from retirement you can probably afford to hold more debt.

If you hate debt then it’s probable that your assets aren’t working as hard for you as they should be.

If it’s merely a liability, then do this

So, if you feel that your mortgage is merely a liability – something you could do without – then it stands to reason that you should minimise its cost as much as possible. In this regard, the interest rate and fees that you pay are the only important considerations. If this is true, then my advice is to jump online and use one of the many mortgage comparison websites to find the lowest cost lender. You don’t need a mortgage broker or personal banker. If all you need is to find the absolute lowest cost mortgage then a spreadsheet or website can do the job. There are lots around – the main ones include; Finder, Canstar, InfoChoice and RateCity.

Why could it be an asset?

A mortgage is an asset because it helps you put your two most important assets being equity and income to work. Without the ability to borrow, all you can do is invest your surplus cash flow incrementally each week, fortnight or month – but this is a significantly less effective strategy.

Investing cash flow versus borrowing to invest: There are two ways you can put your income to work. Firstly, of course, you can use your cash flow to service a loan and you can use that loan to invest in the property or share market. For example, you could borrow $500,000 to invest today in one hit. Secondly (or alternatively), you could invest a certain amount of your cash flow each month e.g. say $2,920[1] per month over the next 30 years. The borrowing option is far superior (assuming a 10% p.a. investment return for both options)! The difference in today’s dollars in 30 years’ time is that the ‘borrowing’ strategy generates over $1.3 million (or 43%) more wealth.

The easiest way to build wealth is to use other-people’s-money

If you want to adopt the most efficient path to becoming financially independent, you should see a mortgage as an asset, not a liability. As long as you have a proven and astute investment strategy, investing more, sooner will help you build significantly more wealth in the long run. The reason for this is the simple law of compound capital growth. Of course, the important caveat here is that you should always borrow within your comfortable and sensible limits. That is, I’m not suggesting that your swing for the fences and borrow as much as you can irrespective of risk. Not at all!

This is why its important to work with the right lender/s and mortgage broker. Consider the situation where you have a reasonable amount of equity in your property/s plus surplus cash to be able to service additional borrowings, but your current bank doesn’t allow you to borrow more money. What is the opportunity cost of this?

For example, a single-fronted-two-bedroom-house in a prime street in Prahran, South Yarra or Hawthorn in Victoria would have cost circa $900k in 2013. Today, the same property would cost in the range of $1.2 and $1.3 million. In this instance, the cost of delay amounts to approximately $100k per year. This puts interest rates and fees in perspective, doesn’t it?

What’s more important than the interest rate?

The most valuable thing a lender can offer you is an unlimited borrowing capacity. I would rather pay a 0.50% p.a. higher interest rate and be able to borrow what I want, when I want – than put my investing opportunities in the hands of a bank.

There are lots of factors that determine a lenders’ appetite to lend money including their valuation process (i.e. are their valuations always conservative, is it easy to challenge a low valuation, can you order proactive valuations without triggering an application/credit check/assessment, what are their loan to value ratios and so on).  Other factors and considerations include their ability to think outside-the-square and apply a common-sense approach (i.e. not get bogged down in ‘policy’), ability to get quick answers to queries and scenarios, ability to be able to fully utilise equity and so on. These things are far more valuable that a small difference in interest rates and fees – because being able to borrow when you want to can make you a lot more money in the long run.

Can you have your cake and eat it too?

I believe that with most products and/or services, you can optimise two out of three factors – but you can never have all three.

These factors include:

  1. price (i.e. interest rate and fees);
  2. service (i.e. ability to work with an experienced and knowledgeable human being that truly wants to help you achieve your goals); and
  3. product features (i.e. maximise your borrowing capacity, allow you to rollover an interest only term without hassle, etc.).

You can only choose two of these. That is, it is possible to find a lender that charges a budget interest rate but its product and borrowing capacity is very basic. Or the borrowing capacity and products are accommodating, the rates are low but the service is inconsistence.

It would be nice to be able to say that you can optimise all three factors but economically, I don’t think it is possible because service (human resources) and product features cost money to provide. So, when selecting a bank to work with, you should try and balance out all three factors. I’m not suggesting that you have to pay an uncompetitively high interest rate (we wouldn’t allow this!). All I’m suggesting is the absolute lowest rate product might not be the best. In fact, it could end up costing you a lot more (in opportunity cost) in the long run.

Common sales tactics: overpromise and underdeliver

A common experience that I have witnessed over the past 15 years in business is that many bank staff in sales roles (i.e. lending managers in a bank branch) promise things that they cannot deliver or control. For example, I have had situations where people have purchased a property on the understanding that the bank will lend them a certain amount of money, only for the loan to be declined or the approval conditions change. Over-estimating a person’s borrowing capacity is a common tactic used by some people to win business. In addition, bank staff have promised interest rate discounts to retain clients (i.e. prevent a client refinancing), but have not been able to get it approved. The list goes on.

It is important to note that all loans have to be approved by a central credit department. And all interest rate and fee discounts have to be approved by a central pricing team. Almost always, the same central departments are used by both mortgage brokers and bank staff i.e. the rules are the same. Over the past few years the banks have been careful to separate the sales function from the credit approval and discounting/pricing functions. This means that we are all on a level playing field, even though (empty) promises might suggest otherwise.

You need to be wary of bank sales staff that promise the world because they might not be able to deliver. If you do rely on bank staff, make sure you get everything in writing. Read the terms and conditions carefully and always proceed with caution.

We have always been conservative with our approach in that we would prefer to under-promise to ensure our clients are never disappointed or make risky decisions. We are not in the business of making empty promises just to win new business.

What should you do?

That depends on your stage of life. If you are still in the “accumulation” stage i.e. accumulating investment assets, then my advice to you is that maximising your borrowing capacity and flexibility is a lot more important (valuable) than minimising your interest rate. Certainly, don’t pay more than you need to. But the ability to invest more now will likely offset any small interest rate differential. If you have already accumulated sufficient assets (and don’t need to accumulate anymore), then price (interest rate) might be your most important consideration.

Also, there are no prizes for loyalty. The bank (or its staff) won’t be there in retirement paying for your living expenses. Borrowing is a game and you need to know the rules. Your goal is to position yourself so that you can borrow money whenever you decide it is appropriate to do so. The banks’ goal is to minimise its risk and maximise its profit. If you understand the factors that are driving the bank to say ‘yes’ or ‘no’, you can play the game to your advantage and continue your investment journey. Doing so will help you build wealth so that you can achieve your lifestyle goals.

Experience helps

Our job is to help you do this. Helping a client borrow to build wealth is a bit like putting a puzzle together. We need to use the right banks in the right order to help a client implement their plans. It’s not always easy or smooth – but then again, most things worth doing are rarely ‘easy’. For us, it’s about a relationship. Partnering with our clients so that we can reflect in years to come and know that we have helped you secure your financial future. That gives us a tremendous sense of achievement.


[1] $2,920 per month is the monthly interest cost on a $500,000 loan at an interest rate of 7% p.a. The investor has the choice of either borrowing the lump sum, investing and using their cash flow to meet the interest expense. Alternatively, if they do not borrow, they could invest the equivalent amount each month. Mathematically, borrowing wins if the investment returns are higher than the interest rate.