The family home and retirement

So you have made it to retirement and you have repaid your mortgage. What now?

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





    COMMENTS

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    Golden Oldie
    30th Jul 2015
    10:25am
    Unfortunately some of these options were not available 30 years ago, and I remember the interest rate going up to 18% on home loans for a short period. Luckily mine was capped at 13%. Super was a pipedream for most and salary sacrifice was unheard of.
    maelcolium
    30th Jul 2015
    10:45am
    Like the majority of financial planners, one stage in life has been excluded, and so the "plan" is shaky. What happens when the home owner(s) need to access a place in an aged care home and the family home is the only remaining asset and reverse mortgaged up to the hilt. No assets, no money equals no choice.

    You can take this risk and get thrown onto the government safety net and good luck with that as the support is being wound back by the politicians. You can live with your children who will be delighted to have old farting people at their breakfast table. Or you can age in your home except that the home care packages are being wound back so that they cost more than the age pension to pay for them and don't forget the government want to change you $18 for a meals for wheels meal.

    Here's a tip for the planning industry. Stop calling the family home an investment and start calling it a social need. Exclude it from the spurious plans that you charge hefty fees to prepare and recognise that it represents a necessity to be swapped so that shelter of some form is available at any life stage. And lastly, remember that nothing is locked in stone. Governments change their minds regularly and people should not place at risk their future comfort and shelter.

    The family home is NOT an investment.
    Paicey58
    30th Jul 2015
    12:12pm
    I have to disagree with you on a couple of points here. Like most people you never want to go to an old age facility until it is a last resort so you will remain in the home and use the asset To have a good level of lifestyle drawing down of the equity you have built up in the ASSET.
    My wife worked in old age facilities and the more money you had the more they charged you. The less you had the less they charged you. Why would you want to pay a large business huge amounts of your money to look after you when you will get the exact same care if you don't have a large amount of money. They actually can't discrimate against you. So enjoy your money you have earned it. The only problem I have with this idea is that interest rateS always vary so you cant give an accurate figure you really are having to guess and hope we don't have anther GFC.
    Kaz
    28th Aug 2015
    9:34am
    I agree that the family home is not an investment for the owner - usually the only ones to make money out of it are the beneficiaries. Or yes it can be used to pay for a retirement unit but that's not why we have it - we want a place to call our own, something the government can't touch (fingers crossed), a goal, security, etc. To call it or treat it like an investment is to start the government on a path to claim it!
    tams
    30th Jul 2015
    11:45am
    Consumer Education – Accessing Equity in your Home.
    One of the best ways to educate older Australians about Reverse Mortgages is to provide examples of releasing equity in the most efficient way. For many seniors the primary purpose of Equity Release is repairs and maintenance to the family home. Retirement income is often insufficient to pay for costly repairs and accessing equity to maintain the home has two purposes. It ensures the value of the family home is not diminished due to disrepair. Additionally, appropriate repairs such as flooring and electrical work provide greater safety for the occupants.
    The secondary purpose for Reverse Mortgages is additional income in retirement. We all understand that the monies earned whilst in employment are never achieved in retirement and adjustments have to be made. But for many retirees the gap is far greater than we would seek, and having regular additional monies would make an enormous difference to the quality of their lives.
    What is the best method to access equity?
    Whilst there is no requirement for regular repayments, it is important to understand that interest is applied to the loan account each month, and this means interest is applied upon interest. It is similar to capital growth when property may increase, for example, 4% per year. The growth is not on the purchase price of 20-30 years ago, but on the previous year’s value.
    The best method to view the cost of borrowing Equity Release is to establish what is required over a budgeted period, say 10 years, and then compare two methods of accessing funds.
    Let’s say a couple aged 74 and 72 own their home valued at $600,000 and would like to access $125,000, based on $25,000 upfront for repairs and maintenance and $10,000 per annum over 10 years.
    We need to forecast two key elements. The first is capital growth and for a home valued at $600,000, the long term growth would be approximately 4% per annum. The second is the interest rate and here we estimate a long term average rate of 9%, as compared to today’s rate of 6.25%.
    The clients have two options
    • take $125,000 as a lump sum or
    • take $25,000 initially and then draw down $833 per month for 10 years
    The result of taking $125,000 as a lump sum is seen as follows
    Year Mortgage Equity Total
    0 125,000 475,000 600,000
    5 196,000 534,000 730,000
    10 306,000 582,000 888,00

    The result of taking $25,000 initially and then a permanent monthly draw down is as follows
    Year Mortgage Equity Total
    0 25,000 575,000 600,000
    5 102,000 628,000 730,000
    10 224,000 664,000 888,000


    Based on a lump sum, in 10 years time there is $18,000 less equity in the home as compared to today’s value. But with a smaller lump sum and regular draw down, there is projected to be $64,000 more equity than today’s value. In both examples there is one important point. There is still considerable equity remaining for aged care if it is required, and still a significant estate for future beneficiaries.
    Hopefully this explanation to Maelcolium will alleviate the concerns expressed, and take note that Reverse Mortgage advice can only be provided by Credit Advisers who do not charge hefty fees
    For a carefully planned assessment of your needs, please contact your local Reverse Mortgages Finance Solutions expert. www.reversemortgagefinancesolutions.com.au
    Paicey58
    30th Jul 2015
    12:21pm
    Thanks Tams.
    Very well explained. I have learnt a lot from this. :)
    JJ
    30th Jul 2015
    8:56pm
    Thank you for the above. I am 66 and a pensioner. Drew my my small (30K)super at 60 My wife is 59 is a part time librarian on 24k p/a We had kept our head above water with some help from my daughter. But now she is raising her 2 year old and moved to Sydney.Also we fear that my wife may lose her job as she just had hernia operation and can no longer lift loads. We have a fully paid CBD apartment valued at about 550K.We want to cut costs which means giving up our Medical Insurance ($250/ mth).The other big cost is the $500/mth Body Corporate hence we are thinking of renting elsewhere in the suburbs and renting our Unit which will get $550 Should we do this or look at the Reverse Mortgage Plan.I dont want lose my$645 fortnight pension week.Should
    tams
    30th Jul 2015
    10:28pm
    JJ
    You have mentioned one of the most important needs of older Australians - maintaining their private health insurance (PHI).
    You are unable to apply for a Reverse Mortgage until your wife reaches 60, but you would then be able to access a facility amount of $82,500. You could draw down each month an amount just to pay for PHI, or an additional amount for some or all of the Body Corp. It's a bit difficult to estimate without additional information, but you could re-assess whenever the $82,50 is draw down and reapply based upon the growth of your apartment.
    TAMS
    Not Amused
    30th Jul 2015
    12:31pm
    The family home is not an investment. It is a possession achieved through hard work, sacrifice and the foresight to make sure that we are not paying rent or relying on taxpayer subsidised accommodation in retirement. I feel sorry for all older people who actually pay for advice only to get snowed with reams of gobbledegook when they are least able to figure it all out. There should just be a basic pension for everyone and the normal tax rates applied to any income earned over and above that.
    Hasbeen
    30th Jul 2015
    3:00pm
    I always have some doubt with advisors love of super. Is it such a brilliant investment for us, or is it a great commission earner for investors. Personally I would rather live a little more, while young healthy & able to enjoy physical activities to the full, than hobble from the tour bus, or cruise ship to the hotel & back, in my 70s.

    I spent 8 years racing cars, then 7 years sailing the Pacific in my yacht, finally settling down in my mid 30s. I still put together a nice 20 acre hobby farm, debt free by retirement. I had little super, but owning everything I wanted, & being light on drinking, gambling & commercial travel, I live the life of a king on $26.000PA.

    I'll spend it now thanks, on fun or a home, & the advisers can find another sucker to get their commissions from thanks.

    With the advent of banks having the right to convert our deposits to share holdings in an emergency, I might just keep my spare money buried in a tin down the paddock, rather than trust a shaky financial system with my future.
    Kaz
    13th Aug 2015
    9:51am
    Sounds like a lot of fun!
    It was/is a good plan!
    stake
    1st Aug 2015
    1:09pm
    in this financial climate and with a prime minister that changes the rules at the drop of a hat how can you plan anything that is condition to all of the tax free advantages that you describe FIRST OF ALL GET RID OF JUG HEAD (ABBOTT)
    MacI
    2nd Aug 2015
    7:08am
    I see the logic in the plan that is outlined in the article. The flaw is that you can't depend on the rules staying the same, especially for a long term plan, as we have recently discovered with the change to the Assets Test for the Aged Pension which won't be grandfathered.
    Kaz
    13th Aug 2015
    9:49am
    Assuming your super company performs and doesn't go belly up...
    elfinawe
    20th Jul 2019
    2:15pm
    According to Centrelink terms of Reference, the Family Home is still your 'home', even if it becomes uninhabitable. How does that work in regards to centrelink turning it into an 'asset' if you cant live there any more? There is absolutely no other info available online. Neither do the Weofare Rights centre or my friend who works for centrelink know anything about this.