Money
Mortgaged to the eyeballs? 3 smart and savvy moves you need to make (and a silly one to avoid)
With more of us hitting retirement age still chained to a mortgage, we need to wake up to the smart – and silly – mortgage moves that can make retirement better (or worse).
By Alex Brooks
It’s no secret that the great Australian dream of owning a mortgage-free home is slipping out of reach – including for those aged in their 50s and 60s.
For more and more people, the mortgage noose is hanging around our necks until we’re aged in our 60s, 70s or beyond.
The number of 55 to 64-year-olds still paying off their home more than doubled from last century into this one – from under 20% to a whopping 45% carrying mortgage debt, according to researchers from AHURI.
And new research from Vanguard says one in three Millennials and Gen Xers plan to retire with a mortgage.
Nestworth Financial Strategists certified financial planner Phillip Bures says there’s only one terrible mistake you can make if you have a mortgage when you’re older.
“Never pay interest only,” he says. “You need to be paying principal and interest to get that debt reduced over time.”
Rule 1: Prioritise a mortgage offset account to pay down your debts in a tax-effective way
It’s only natural to want to be a mortgage-free home owner, especially when you’re retired.
A debt-free home close to family, friends, medical facilities and the activities you love is a key piece of infrastructure to have in place for a happy retirement lifestyle.
A fully owned home gives you more than a roof over your head, though – it’s a financial safety net that can later be turned into retirement cash in the form of a reverse mortgage or Housing Equity Access Scheme as you get older or run out of superannuation.
So even if you have a mortgage, don’t let the worry about paying it off steal your dreams of a secure retirement.
Paramount Financial Solutions certified financial planner Wayne Leggett says most Australians are holding mortgage debt later in life – and you don’t need to stress over it.
“The most important factor is that whatever type of loan you have, there should be an offset account attached to it,” he says.
“Every dollar you have in an offset account is as good as having paid off the home loan because it’s reduced the balance.”
Wayne explains that offset accounts are the best bang for your taxpayer buck and mortgage holders should use them strategically.
“If you have money in a bank account, the taxman wants his clip of the 4% interest,” he says.
“If it’s in an offset at the 6% mortgage interest rate, the tax man gets nothing so you’ve doubled your return.”
Rule 2: Don’t pay off the mortgage at all costs – be strategic, not fearful
Wayne goes one step further than having an offset account by recommending people pay off their mortgage and contribute extra to their superannuation at the same time.
“Most people ask me whether they should pay off their mortgage or pay more into super,” he says.
“They panic when I tell them to do both and then they ask ‘but how will I pay off my mortgage?’”
At which point Wayne patiently explains they will pay off their mortgage with all the extra superannuation they’ve grown by contributing extra.
If you're still earning a professional salary in your 50s or 60s, topping up your super could be smarter than throwing everything at your mortgage.
Why? Because $1 extra contributed into super via salary sacrifice is taxed at just 15% – so 85 cents gets invested.
That same $1, if used to pay your mortgage, comes from your after-tax income. On a typical salary, the tax office takes 30–45 cents, leaving you with just 55–70 cents to pay down the loan.
Rule 3: It’s your housing equity that can help you out of a retirement-income jam
Owning your own home – whether it’s fully paid off or not – gives you a powerful advantage when it comes to qualifying for the Age Pension and the valuable concessions that come along with it.
That’s because your primary residence is exempt from the Age Pension assets test – even people living in a $10 million house can qualify for a government-funded Age Pension.
For Australians in their 50s and beyond, your own home (even one with a mortgage) can also be a financial lever.
You can use your housing equity to downsize and make a bonus contribution into your superannuation.
Consulting actuary Andrew Boal estimates that around $1.3 trillion of Australia’s $11 trillion real estate wealth is home equity owned by people in retirement.
It’s a vast, mostly untapped resource that could play a key role in funding better retirements. More on this here: 14 truly useful ways to use your home equity
As long as you end up reducing your mortgage debt over time, you can continue to live the life you want under the roof you love, building something valuable that can help.
This article contains general information only. It is not financial advice and is not intended to influence readers’ decisions about any financial products or investments. Readers’ personal circumstances have not been taken into account and they should always seek their own professional financial and taxation advice that takes into account their financial circumstances, objectives and needs.
Feature image: iStock/skynesher
Tell us in the comments below: Will you carry a mortgage into retirement?
More help for mortgage owners: