Managing investments and personal debt is a balancing act many individuals face. One common scenario is when people have an exchange-traded fund (ETF) portfolio yet also carry a mortgage bond. This situation raises questions about whether to sell investments to pay off debt or to stick with the current strategy.
Let’s explore an example where someone has held an ETF portfolio for nearly ten years while also paying off a mortgage. Currently, the value of the ETF is equal to the outstanding bond amount. The individual must decide whether to sell their ETF, cover capital gains tax (CGT), and pay off the bond or to keep things as they are.
To make sense of those options, let’s break down the numbers. Imagine the ETF is growing at an impressive annual rate of 12%. Meanwhile, the mortgage interest rate stands at 10.45%. On the surface, it looks like this person is earning a profit of 1.5% by leaving their investments intact. However, some key considerations might change this viewpoint.
First, selling a large portion of the ETF all at once means triggering capital gains tax in a single year. Depending on current tax laws and individual circumstances, this could result in a significant tax bill that might erase some of that profit. Instead, gradually selling smaller amounts over the years, perhaps during retirement, might keep tax liability lower and more manageable.
Another option is using portions of the portfolio methodically. By planning yearly sales that stay within tax-free thresholds, the individual can minimize taxes while applying those gains directly toward the bond. For example, selling enough ETF shares to realize just under the capital gains tax limit each year would allow them to pay down the bond effectively.
Understanding the bond type is also crucial. If it is a traditional bond, settling it early might require notifying the bank well in advance to avoid penalties. An access bond, on the other hand, allows for early payments without closing the account, offering a safety net for emergencies while still benefiting from lower interest rates.
Ultimately, the decision varies by individual preference. Some may feel that a fully paid-off home provides peace of mind. Others may see the value of continuing to grow their investments, viewing them as a long-term retirement strategy.
In conclusion, the choice between selling an ETF to pay off a bond or keeping the current positions isn’t a simple one. It involves weighing tax implications, interest rates, and personal comfort with debt and investments. Each individual situation is unique, and careful consideration can lead to the best path forward.