Why your adviser doesn’t want you to pay off your home loan quickly


You probably go to a financial planner hoping to get advice on your financial future, and assume the person across the table has your best interests at heart. But do they?

There are many factors that influence the advice financial advisers provide. The majority make money by charging you a fee based on the amount of money they give advice on and “manage”, sometimes more than 2% per year. This means the more you invest, the more they earn.

Consider this.

Jenny and Joe are a typical working Australian couple. They have a $300,000 mortgage and pay 5% interest each year. Jenny’s Aunt Melda passes away and leaving $100,000 in cash to Jenny. Jenny and Joe visit a financial planner to get advice on what they should do with the money.

Do they invest in other assets or pay off the mortgage?

Which one of those two does an adviser earn a fee from?

That’s right, investing in other assets such as a fund or shares – so this is likely to be the advice they’re given, even though it’s not necessarily their best option.

9 times out of 10 it makes more financial sense for Jenny and Joe to pay down their mortgage. By doing so, they effectively lock in a guaranteed return as they will no longer have to pay interest on their mortgage. Being on the 39% marginal tax rate (including medicare) they lock in a guaranteed annual return of 8.19% pa by paying off their mortgage!

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