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Homing In On Retirement

Pick an Australian, any Australian, and chances are they dream of buying a home or upgrading the one they already own. 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 as you raise a family. But home ownership also has a role to play in retirement planning.

For most of us, 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 that the better you manage your mortgage and other debts along the way, the more money you will have 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 nest egg. 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, ask your lender or your mortgage broker to review for a better deal. More often than not they will reduce your interest rate to keep your business, which saves you the cost of refinancing.

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.  This means you continue to pay interest whilst you still owe the full amount that still needs to be paid off in future and it has the effect of costing you more over time.

Once again, that money could be earning compound interest in super and bankroll some memorable travel experiences in retirement.

If you would like a review of your home loan options, our sister company Moneyclip Home Loans, powered by Smartline, can assist in helping you save money and owning your home quicker.

Tax Efficiency

Tax also has a 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 per cent 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 whilst still balancing other financial aspects. When it comes to investment property, you will need to consider the impact of land tax which is a state-based tax.  Each state has its own threshold.  Ensure that you are discussing all tax matters with your tax accountant.

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, give us a call on 02 9299 2292.

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