September 22, 2017
You have purchased your home and committed to an on average, 30 year mortgage, and interest payments make up a significant part of your repayments.
Paying off your Mortgage Faster
Home loan borrowers have wised up a lot over the years, and one of the main reasons for that is the knowledge being shared by independent brokers with their clients, and the information now available on the internet. Most people know that the best way to cut down your mortgage is to make higher repayments and if possible, make repayments fortnightly rather than monthly.
But is paying off the mortgage sooner the best option? Is putting extra money into your super a better option? We look at the pros and cons.
Your Extra Mortgage Payments
- The additional money you put into your mortgage is generally after-tax income.
- The interest rates your additional money is earning is the same as your mortgage interest rates. There is no tax applicable to that notional ‘earning’.
- If your home loan has the flexibility of a redraw facility, then the extra money you have placed into your mortgage is available to you immediately.
- Selling your own home is tax free. Profit made is all yours.
- While repaying your mortgage the equity in your home is increasing.
Placing your Extra Money into Super
- Contribution tax on super payments is at 15% or 30% for those earning over $300,000.
- You can salary sacrifice super payments from pre-tax income. However, you cannot access these funds until you retire.
- Money that your investments earn is taxed at 15% maximum and up to 10% on capital gains. It’s worth comparing that with your marginal tax rate on retirement.
- If you elect to receive your super as regular income, then generally, investment income from your super is tax free.
Your age is an important consideration because you cannot access your super until after you turn 65. The retirement age is increasing with each generation. Some pensions are not available until you turn 67 and that is forecast to move to 70 in the not too distant future. However, if you are on a private super fund scheme, your retirement age is up to you.
Your Returns on Super
Markets go up and markets go down, and depending on where your super fund is investing the majority of its money will affect the return you get annually. You need to consider a few different things such as when you plan to retire and what type of super fund is your money being invested.
As stated, you need to compare the interest rate on your home loan to that of your super fund. Don’t forget to allow for tax. Speaking of tax, your marginal tax rate on your income should also be considered. Super may be a more tax-effective option if you’re in the 20% or above marginal income tax rate.
There’s nothing quite like owning your own home. No more mortgage payments to be handed over each month. That gives you a sense of security. Equity in your home can provide you with a number of different options such as property investment. Investments can turn into income streams further down the road and come in handy after retirement. Also, realising an investment earlier than retirement age might provide enough money to pay off the mortgage anyway.
Everybody has different circumstances, financially and personally. By having a chat to us here at Mortgage Choice, we can run through some figures and provide invaluable information. We’re here to help.
Talk to us about your home loan needs today. Contact us on 02 9653 9333, email: firstname.lastname@example.org or click HERE to arrange a meeting.
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