Revolving mortgages and leverage

I know a number of you will have revolving mortgages or offset mortgages. Of course the advantage of an offset mortgage is that you only pay interest on the difference between your borrowings and your savings.

A big trap though with a revolving credit mortgage is to use it as an ATM machine. In my view borrowing to spend on holidays, cars and boats or non appreciating assets is not a smart financial decision. These type of things should be paid for out of savings and if those savings don’t exist then these items should be deferred until savings can pay for them.  Of course increasing your debt to invest in appreciating assets such as investment property or shares is ok as long as the debt can be comfortably serviced. 

Note though that borrowing to invest in shares is risky given the greater volatility that the share market has versus property. Of course one real benefit of borrowing to invest is that the interest is tax deductible. If you are not looking to use your mortgage for additional investment purposes i.e. property or shares my advice would be to take a standard mortgage that cannot be increased, that you pay down over time on a regular basis. Note that in a rising market a mortgage will give you leverage. The assumption here is that the capital gain in your property is greater than the cost of borrowing which of course has been the case in Auckland over the last few years. A house that has no borrowing on it will only increase at the rate of capital gain. 

This leads me to comment that in a low interest and rising market environment there is some downside in paying your mortgage off quickly. Doing so will negate the leverage effect of a mortgage. Of course there are peace of mind reasons for paying a mortgage off early. Note too that in a falling market environment having leverage (a mortgage) worsens the return.