The suggestion might sound a little absurd coming from me: “delay paying off your home loan”.
But, given record low mortgage rates, it can actually make sense. If you’re nearing retirement, thinking of turning your mortgage into an investment loan, getting ready to gear into shares or planning a well-deserved holiday, putting more than your minimum repayments into your loan or paying principal and interest rather than just interest may not be the smartest move.
Here are four reasons why you may want to put the brakes on paying off your loan in record time. You’re nearing retirement
1. This one actually goes against what most of us have been told: that you should enter retirement with little or no debt.
But as financial adviser Joanna McCreery, of Majella Wealth Advisers, says, it can make good sense to direct any extra cash to your super fund through salary sacrificing rather than throwing it into your loan.
“Depending on your taxable income and, if you’re under your concessional contributions cap – $35,000 if you’re over 50 and $30,000 if you’re under 50 – you can save a lot of tax and end up with more money in your super fund, so when you do retire you can pay off your loan,” she says.
Contributions to super from pre-tax dollars attract a 15% tax rate if your income is under $300,000pa.
So, for example, if your marginal tax rate is 37% (plus 2% Medicare levy) and you’re earning $100,000pa, then rather than paying an extra $1000 a month of after-tax money into your mortgage, you could salary sacrifice $1640 a month ($1000 after tax outside super) into super.
After 15% contributions tax, this boosts your super balance by $1394 a month. In five years you would have contributed an extra $83,640 into super rather than paying $60,000 off your mortgage. McCreery says once you are over 60, if you are still working you can use tax-free pension payments from your super to pay the mortgage. Once retired, you can withdraw a tax-free lump sum to pay it all off.
2. Keep your stamp duty limit
If you’re lucky enough to be at the pointy end of your mortgage repayments, then by all means pay it down to zero but think about keeping the loan facility open.
As Smartline Personal Mortgage Advisers state manager Michael Daniels says, if you discharge your mortgage you lose your stamp duty concession and you could have to pay a fee if you try to reborrow.
Mortgage duty is no longer levied for residential purchases in most states but it is charged at about $4 per $1000 if you borrow against your home for other purposes, such as buying shares or for a holiday.
“If you paid mortgage stamp duty in the past, it will be based on the original size of the loan,” Daniels says.
“If you borrowed $400,000, for example, you will have a stamp duty limit within that amount. If your redraw stays within this limit you don’t have to pay duty again – for any redraw purpose.”
3. Higher long-term returns
Paying extra cash into your mortgage is an excellent, low-risk savings strategy. It beats a lot of other alternatives – but not all.
The effective return of paying extra cash into your home loan or offset account is around 5% for most people right now. What if you could earn more than 5% after tax on an investment? Then, McCreery says, paying extra cash into that investment would give you a better outcome than paying down your home loan.
“An investment in a share or high-growth portfolio should offer better long-term returns than 5%,” says McCreery. “Over the past 10 years, the Australian sharemarket has returned 9.4%pa.
This extra return on your money adds up over the long term but you do have to be patient and take advice on how to build an appropriate portfolio.” Of course, McCreery warns, you would only enter into this kind of dual strategy if you don’t need this extra cash for at least five years, you have the risk appetite and you have some buffer in your mortgage in case you need to access emergency funds.
4. Home as an investment
Paying off your mortgage on a principal-and-interest basis is great for ensuring you build up equity in your home. But, as mortgage broker Stuart Butler says, if you’re buying your first home and intend turning it into an investment property later, then interest only may be the way to go.
“If you pay off the principal of this loan, you will affect the future tax deductibility of your loan structures.
A much better option would be to maintain this loan on an interest-only basis and build up your equity in an offset account.”