I currently earn quite a good salary (around $250,000 Australian dollars per year). Due to a recent investment coming good I am expecting to be receiving a windfall of around $1.2 million Australian dollars (after tax). My wife and I are both under 35 years of age, and we have two primary school aged children.
Because of my current high income, my wife does not work and has been a full time mother for the past 5 years.
We currently owe around $450,000 on an investment property in in a blue collar working suburb in Sydney that is currently valued at about $900,000 (and currently going down in value, although I expect the bottom of the market would be about $750,000 - so still ahead). The house is tenanted and the rental income is more than our mortgage repayment. Our current repayments have us on target to have it paid off in around 15 more years.
We carry no credit card debt or loans of any kind outside our mortgage (cars, gifts, holidays all paid in cash), but we do currently rent our primary home.
For our windfall I have allocated:
- $120,000 (10%) for charitable giving
- $120,000 (10%) "rainy day" fund
- If I'm being honest, more money than I should for a nice condition second hand Porsche 911
However that leaves around $900,000 unspent.
The reason we are renting our current home is because we live in a semi-rural area. Houses here take 6-12 months to sell and we didn't want to get stuck with a house we can't sell if we had to move back to a large city.
My current thinking is that I should not bother to pay down my investment property mortgage:
- It would take 50% of the remaining funds which could be used more wisely elsewhere
- We are earning more from the property than the monthly payment
- Interest payments are tax deductible
- If we have a bad year for maintenance and we dip into losing money on the house that year, that decreases our taxable income for the year (negative gearing)
- If we chose to buy our primary residence outright we would have much less money to do so
- It's not like we were cash strapped to begin with, so we could easily stay the course on this property and use the money to diversify our portfolio away from just property
However my wife strongly disagrees. She sees value in completely paying off the mortgage on our investment:
- The huge psychological boost for her knowing that the house is secure
- There is no year-to-year property taxes (just a single stamp duty tax when the property was purchased, and then capital gains tax when it's sold), so the ongoing ownership costs are extremely low
- Essentially, nobody can ever take that house away from us if we financially go down the toilet later in life
- Our children are entitled to very low cost higher education, so there's no need to put money aside for their college funds (and if we did so, an entire degree would be maybe $50,000)
Half my brain is yelling at me to just pay down our entire Sydney property and buy something cheap to live in with the remaining money.
The other half of my brain is telling me to leave the Sydney house alone, buy something cheap in our current town, not be too concerned if we have to take time to sell it later, and do something sensible with the rest of the money (invest, throw it into our superannuation accounts, etc)
The third half of my brain is telling me to spend all the remaining money on a really nice house in our current town and say "to hell with it" and just live here forever (it's a very nice area).