02 Mar Homing in on Retirement
Even with the current property market the dream of home-ownership or upgrading their current is still big in the minds of many Australians. There’s the emotional satisfaction of knowing you own the roof over your head, the freedom to rip up carpets and keep a pet, and the stability it offers. But home home ownership also has a role to play in retirement planning.
For most Australians the long-term goal is to retire with a home fully paid for and enough investments both inside and outside superannuation to support a comfortable lifestyle. What is less well understood is how to better you manage your mortgage and other debts along the way to ensure you have more money for income-producing investments to fund your dream retirement.
Spending too much on renovations or buying in the wrong location are common mistakes that may potentially reduce your retirement income. Moving is costly and if a renovation doesn’t add value then it is money that can’t be recouped if you decide to downsize later in life.
The right loan
The loan you choose can also make a big difference to your retirement. Interest rates may be at historic lows, but there are big differences in the rates available from different lenders so it pays to shop around. If you already have a mortgage we can help you get a better deal, it’s one of the services we offer. Contact us for more information.
It also pays to think about the type of loan you choose. While interest-only loans often make sense for investors, they can be an expensive choice for owner-occupiers even though on the face of it they appear more affordable.
The catch with this type of loan is that without any repayment of the loan principal, interest-only borrowers are continually paying interest on the full amount of the loan.
The Australian Securities and Investments Commission (ASIC) recently crunched the numbers and found that on a $500,000 loan at 6 per cent, making interest-only payments for just five years can add $37,000 to the long-term cost of the loan.
Once again, that money could be earning compound interest in super and bankroll some memorable travel experiences in retirement.
Tax also has a huge role to play when it comes to managing your housing debt for the best retirement outcome. While your family home is generally exempt from capital gains tax, the favourable tax treatment of the family home does not extend to your home loan.
Unlike investment loans, your mortgage is not tax deductible so paying down the mortgage and freeing up money for investment is an important step in your retirement planning. However, the best place for your surplus cash may depend to some extent on your marginal tax rate.
For people on high marginal tax rates, salary sacrificing into super may be more effective than paying down debt. That’s because pre-tax contributions are generally taxed at just 15% rather than your marginal rate. This strategy is even more effective when investment returns are higher than home loan interest rates.
For people in lower tax brackets it is generally preferable to pay down debt first and reduce interest costs.
Home and hosed
The closer you get to retirement the more important it is to be debt free, especially if your resources are limited.
Unless you rent out a room or enter into a reverse mortgage – a product that has never really taken off in Australia – your home won’t produce any income in retirement. So a balance needs to be struck between the amount of money you sink into your home and the amount you direct into income-producing investments.
If you would like to take a more holistic approach to your retirement planning, including the role of your family home, please give us a call and we can help.