So you have made it to retirement and you have repaid your mortgage. What now?
Our no-nonsense planner Maurice Patane believes that the family home is an investment, and not just a place in which to live and create memories.
The family home provides you with a place of rest, a place for your possessions and a place to interact with and raise your family. At the same time, your home binds you to your community.
However, the family home is also a source of security for retirement and is often the largest investment we make during our lifetime. In fact, it is one of the last remaining assets that is tax free, and the same applies if it is sold within two years of your death. Almost everything we’re taught about the family home is focused on repaying the mortgage – to be debt free, to have greater equity, to build a bigger cushion. We’re taught that’s the ultimate goal.
I’m an adviser who talks to humans. I also happen to be human. From my experience, I know humans aspire to more. They want a comfortable lifestyle, they want to travel, buy a new car, and support their children and grandchildren.
To achieve these goals, we rely on the three pillars of retirement wealth: the Age Pension, compulsory superannuation and voluntary savings.
In many cases we are unable to obtain Centrelink benefits, or maybe we are self-employed and did not contribute to superannuation, or through circumstances we were unable to save. So, I then had a subtle change in my thinking. What if the family home became the fourth pillar? After all, we saved for it. It is an investment. We have equity in it. So, what if we were to start treating the family home as any other investment, the same way we do with superannuation and savings? Investments are meant to be used. They’re not meant to sit on a shelf and collect dust. Therefore, instead of thinking in terms of saving I started to think of using the family home.
So how can you be smart about your family home and mortgage so that you have more control and enjoy a more comfortable lifestyle with some luxuries along the way? The finance industry, parents, teachers and even personal finance books suggest you should repay your mortgage as a priority. And I agree. But, is there a smarter way?
During our working life, banks teach us to make loan repayments over a period of time, say 30 years. And at the end of that time, we have repaid the mortgage. We refer to this as a principal and interest loan, and the value of the home represents the equity it has built up.
As an adviser, I am often asked, “Is it better to pay off the mortgage or invest more in super?” My answer is that it depends. If ‘it depends’ is right for you, then let’s consider it. If you receive a pay slip, then, as others do, you may have moaned about the fact that what you receive is less than what you earn. Why? Tax!
So let’s put the two items together – the loan repayments and the tax we pay.
Another way of making home loan repayments is to make interest-only repayments. This means you will still owe the same amount with which you started. It also means your loan repayments are less and so you have more money to spend or save. Let’s stick with ‘save’ for now, because you have created a good habit.
As an example, a mortgage of $300,000 will require principal and interest repayments of $2451 per month, assuming a term of 15 years and interest rate of 5.5 per cent. On the other hand, an interest- only loan will require loan repayments of $1375 per month, which means you have an extra $1076 per month.
While home loan repayments are usually made with after-tax money, super contributions can be made with pre-tax dollars (the money you earn before tax is deducted). This part is a little tricky and sometimes gets me too. So, $1076 extra each month in your pocket is the same as $1763 each month before tax assuming a marginal tax rate of 39 per cent.
However, you can direct $1763 per month to superannuation via a salary sacrifice agreement with your employer or, if you are eligible, by claiming a personal tax deduction. Remember, superannuation is taxed at 15 per cent (generally less than your personal tax rate) and so the amount invested in your super will be $1499 each month. Simple maths suggests that $1499 each month will provide a higher result than $1375 each month to your home loan.
You continue this until your retirement. You still owe $300,000 on your mortgage, but your superannuation is worth more – in fact, it’s $438,116, assuming an interest rate of six per cent over 15 years. So you can then repay your mortgage using your tax-free superannuation and have an extra $138,116.
So you have made it to retirement and you have repaid your mortgage. What now?
My preference is to retain the mortgage loan facility. Note I said loan facility and not loan amount. This gives you the ability to redraw money later – this is when you get to use the family home as an investment. But, it should only be considered after you have exhausted your other savings.
At this stage of life, you may wish to supplement your existing retirement income or go on a family holiday. You checked with your adviser and they tell you the trip fits in your plans perfectly. When the time comes to use the extra money, there’s no need to feel guilty. Instead, you’re using an investment that helps you get something that you really value – time with your family.
In this case, you can take the money either as a lump sum or draw down a regular amount from your mortgage account, or both. However, the difference is that you don’t make direct loan repayments. Instead, the interest on the loan amount is added to the amount you use (borrow) – up to a limit, of course.
You don’t need to repay the loan until you die (sorry to be so blunt), sell or vacate the home. Of course, there will be less for your beneficiaries, but imagine the difference between a modest lifestyle and a comfortable lifestyle.
So let’s now understand the impact on your Age Pension.
Let’s say you have determined that an additional $1000 each month will provide you with a more comfortable lifestyle. I prefer that you receive this through a drip-feed facility instead of a lump sum.
There are many reasons for this, but let’s consider three of them:
- you are less tempted to spend all of the money at once and, importantly, it will ensure you retain good money habits; consider it as an add on to your existing Age Pension
- you only pay interest on the amount you have withdrawn; interest on $1000 is far less than interest on, say, $150,000
- there is no impact on your Age Pension: the amount not withdrawn will not be assessed under the assets test, and as the regular monthly cash payments of $1000 are low and being used immediately, they will not be assessed under the income test.
Then all your friends will notice how much happier you are!
Maurice Patane has been a financial planner for over 25 years. His experience has shown him that many Australians are not living the lives of which they dream, which is often due to poor financial decisions. Maurice is dedicated to helping everyday Australians take control of their financial future, so that they no longer have to worry about money.
If you have a question or Maurice, please email finance@yourlifechoices.com.au
