Weigh up all your op­tions

Should you put spare cash into your mort­gage or su­per? So­phie Elsworth asks the ex­perts

Central and North Burnett Times - - MONEY -

TIPPING ex­tra money into your mort­gage ver­sus fat­ten­ing up your su­per­an­nu­a­tion bal­ance ... What’s the best choice?

It’s a long-run­ning de­bate that can be ex­ten­sively ar­gued and of­ten leaves ev­ery­one scratching their heads.

Home loan in­ter­est rates have never been lower – many are in the 2-3 per cent range – while re­turns on su­per funds are in the dou­ble-digit cat­e­gory.

Lat­est statis­tics from su­per re­search house Su­perRat­ings showed a me­dian bal­anced fund re­turned 13.8 per cent in 2019 – a stel­lar re­sult for those squir­relling money away into their re­tire­ment kitty ei­ther com­pul­so­rily or through vol­un­tary con­tri­bu­tions.

How­ever there’s still a large sec­tion of so­ci­ety – one in three Aus­tralians – bur­dened with a mort­gage and many of these bor­row­ers re­main fo­cused on pay­ing off this debt.

Time is of the essence. We are al­ready one month into the new decade and now could be the per­fect op­por­tu­nity for Aus­tralians to re­assess their fi­nan­cial state of play, to work out whether they are bet­ter off shav­ing down their home loan debt or fat­ten­ing up their re­tire­ment sav­ings.

MORT­GAGE

The fi­nan­cial se­cu­rity of own­ing your own home can be a bless­ing, par­tic­u­larly once you en­ter re­tire­ment.

Fin­ish­ing work with­out mort­gage debt is a de­sire for most re­tirees, who don’t want to be shelling out money to put a roof over their head.

Prop­erty Plan­ning Aus­tralia’s man­ag­ing di­rec­tor, David John­ston, be­lieves that fo­cus­ing on home loan debt ahead of re­tire­ment is the best op­tion.

“Pay­ing down your home loan ahead of plac­ing ex­tra funds into su­per makes sense pro­por­tion­ately to the length of your time hori­zon un­til re­tire­ment,” he said.

Mr John­ston said pour­ing ex­tra money into your home loan – usu­ally with a vari­able rate – in­stead of your su­per al­lowed you to have a re­draw fa­cil­ity where you could dip into the funds in the case of an emer­gency.

“This pro­vides you with en­hanced risk man­age­ment should you have cash flow fluc­tu­a­tions,” he said.

When ex­tra funds are thrown into su­per they must stay there un­til the ac­count holder reaches preser­va­tion age – cur­rently be­tween 55 and 60.

“You can­not ac­cess your money once it has been con­trib­uted to su­per,” Mr John­ston said.

Fig­ures from MoneyS­mart’s on­line cal­cu­la­tor show, on a $300,000 30-year home loan with an in­ter­est rate of 3.5 per cent, the monthly re­pay­ments are $1347.

If the bor­rower tips in an ad­di­tional $200 a month from the be­gin­ning of the loan they will cut six years and one month off their loan term, and save about $42,000 in in­ter­est costs.

The Re­serve Bank of Aus­tralia could cut the cash rate again this month or in the com­ing months, which is likely to bring down mort­gage rates even fur­ther.

Tribeca Fi­nan­cial chief ex­ec­u­tive of­fi­cer Ryan Wat­son said: “Where at all pos­si­ble, it is al­ways a good idea to con­trib­ute ad­di­tional loan re­pay­ments to your home loan.

“It will help de­crease your non-de­ductible debt, while at the same time re­duce the re­pay­ment term on your home.”

SU­PER­AN­NU­A­TION

Aus­tralians have lapped up stel­lar re­turns on their re­tire­ment sav­ings in the past year, with strong fi­nan­cial mar­kets giv­ing their bal­ances a healthy boost.

Tribeca’s Mr Wat­son said pump­ing ad­di­tional cash into su­per was “a great way to save on tax”.

“A per­son earn­ing over $90,000 per an­num will save at least 22 per cent tax on the con­tri­bu­tions (up to a cer­tain limit) they make into su­per­an­nu­a­tion – this can save peo­ple thou­sands of dol­lars in tax each year,” he said.

Mr Wat­son said the ben­e­fit of com­pound in­ter­est for ad­di­tional con­tri­bu­tions made into a su­per ac­count was sig­nif­i­cant.

“With in­ter­est rates so low at the mo­ment, the tax sav­ings as­so­ci­ated with fo­cus­ing on and mak­ing ad­di­tional pre-tax con­tri­bu­tions into su­per­an­nu­a­tion makes a lot of sense to me,” he said.

Know your su­per preser­va­tion age. Aus­tralians born be­fore July 1, 1960 can ac­cess su­per when they turn 55, but those born af­ter this date must wait up to five years longer, de­pend­ing on the year they were born.

For ex­am­ple, if you were born be­tween July 1, 1962 and June 30, 1963, your cur­rent preser­va­tion age is 58.

Some peo­ple choose to work even if they are ac­cess­ing their su­per.

In­trust Su­per chief ex­ec­u­tive of­fi­cer Bren­dan O’Far­rell said, in the long run, throw­ing ad­di­tional cash into su­per would be likely to de­liver a fat­ter re­turn. “In the longer term, it’s also pos­si­ble that in­vest­ing money in a su­per fund’s bal­anced op­tion could gen­er­ate a greater re­turn than the in­ter­est rate on a home loan,” he said.

“But on the other hand, in­di­vid­u­als on lower in­comes, with less dis­pos­able in­come, could be more suited to mak­ing loan re­pay­ments, given this doesn’t lock their money away un­til re­tire­ment.”

Mr O’Far­rell said once the home was paid off and chil­dren had left the fam­ily home, Aus­tralians could be in a much bet­ter fi­nan­cial po­si­tion to throw any ex­tra money into su­per.

The As­so­ci­a­tion of Su­per­an­nu­a­tion Funds of Aus­tralia’s chief ex­ec­u­tive of­fi­cer, Dr Martin Fahy, said in the 10 years to Jan­uary this year, me­dian bal­anced su­per funds had de­liv­ered av­er­age re­turns of 7.7 per cent an­nu­ally. “That com­pares with an av­er­age mort­gage rate of

6.1 per cent over the 10 years or 4.9 per cent if you took a very ba­sic home loan,” he said. “Purely on arith­metic, that last 10 years would sug­gest that you would be bet­ter off at a ra­tio­nal eco­nomic level with money into your su­per­an­nu­a­tion,” he said. “But, look­ing for­ward, it’s dif­fi­cult to know where in­ter­est rates and re­turns are go­ing to go.”

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