We can barely afford the mortgage, should we sell our investment property?

Should we sell our investment property? We owe $890,000 against a property valued at $1.1 million. It was working for us when interest rates were low, but today we have to find at least $2000 per month to plug the gap between the rental income and the mortgage repayments (interest only). And that is provided there is no maintenance or other issues. We’ve been hanging in there hoping rates would drop, but not sure how much longer we should/can cling on.

Inflation has proven to be stickier than the Reserve Bank would have hoped. Whereas at the beginning of the year, there was an expectation that interest rates would fall in the back half of 2024, today most commentators seem to be guessing at drops in 2025 at best. There are some who even suggest rates may need to rise further.

Rents have risen around most of the country, so this certainly helps on the cash flow front, but as you note in your question, it’s still not enough. The situation you describe here is the reality of negative gearing.

I don’t possess a crystal ball to be able to tell you when rates will fall and your investment will become more affordable. You are in a positive equity position here, so if you choose to sell, you will walk out with cash in your pocket.

You would need to get clear on your capital gains tax position, but even allowing for this, it’s difficult to foresee you exiting this investment in a terrible position. Perhaps this is an opportunity to reset your strategy. There are lots of other wealth creation strategies out there without the stress of negative gearing.

There would certainly be value in you having some financial modelling done to determine whether you are on track to meet your medium and long term financial goals, and how those outcomes look with or without this investment property. It may be that given the cash flow drain required to hold this property, your long-term outcome is better without it.

I’m a 54 year-old and have been salary sacrificing 6 per cent of my wage to super since I started work as an 18-year-old. It is a state government defined benefit type and my current projected benefit at age 60 is roughly $2.3 million. My wife has about $200,000 in superannuation. Our mortgage is currently $195,000 and we have no other debts. Should I reduce, or even stop, my contributions and focus on paying off the mortgage faster?

Defined benefit funds come in many varieties. You should investigate whether the portion of your superannuation benefit that is over the transfer balance cap, currently $1.9 million, could be withdrawn upon retirement and used to boost your wife’s super, and clear any remaining mortgage.