Pay off your home loan, fast as you can. That’s the iron-clad advice given time and time again to property buyers.
That loan is costing you, say, 6.5 per cent, and there are no tax incentives to hold debt on your principal residence. Assuming you have paid off more expensive loans and any credit-card debt, you should nix it pronto. Right?
Well, the problem is that paying the loan back comes with a nasty opportunity cost.
Mortgages have long been the cheapest funding in town, but the bargain money available has been pushed to new extremes by global central bank stimulus measure. Some standard variable home loan rates are now the lowest in 40 years after the Reserve Bank cut the official cash rate last week.
This means that for those with outstanding loans on their principal residence who plan to downsize in the future, it may be better to forgo all but the minimally-required mortgage payments in favour of super contributions, new advice from some financial advisers suggests.
This can produce a better outcome for those in higher tax brackets in particular.
Let’s say you pay tax at the top rate and you have a three bedroom home with a $1 million loan. Eventually you sell it, and spend $500,000 on a unit. Had you paid the full $1m loan off, you would have a good sum of change to spend and invest after moving into the new residence.
But the problem with this scenario for higher earners is that the money used to pay down the mortgage was likely taxed at up to 50.5 per cent.
A smarter option would arguably be to maximise concessional contributions to your super fund, up to the $30,000 and $35,000-a-year limits depending on your age, paying only 15 per cent tax and potentially outperforming the 6.5 per cent cost of your mortgage, depending on how and where your super is invested.
Vital to making holding onto a mortgage work is being able to find suitable accommodation at a substantially lower price than what you sell your family home for. This is where the main gamble lies. Downsizing does not always result in a windfall as people often want to move closer to amenities such as transport and hospitals, and that comes with a higher price tag.
Banking on the kids leaving home can also be risky, as many parents discover.
If you can accept those obstacles to downsizing as a retirement strategy, carrying home loan debt for longer in today’s environment of low interest rates and cheap money can be considered a fairly conservative path to take.
“If your kids have left home and you are an empty nester and inevitably planning to downsize, it’s a no brainer,” says one adviser.