For many Australians, being mortgage free is the ultimate goal, but is it all its cracked up to be when retirement comes?
Working out whether to prioritise paying extra on your home loan or boosting your superannuation is an age old question, to which there is more than one answer.
Financial advisor and ProSolution Private Client director Stuart Wemyss says deciding what to focus on usually comes down to three key factors.
These are: how long you have until you will access super' your income and surplus cash flow; and the size of your mortgage relative to your income.
“If you are a few decades away from retirement, for example in your ‘30s, it generally makes sense to prioritise paying down your mortgage as quickly as possible,” he explains.
“This reduces the impact of compounding interest (expense) on the loan, and you still have plenty of time later to increase super contributions.
“If you have a strong income and surplus cash flow, you may be able to do both at the same time, making additional super contributions while also accelerating home loan repayments.”
Planning for the future or reducing debt?
Victoria-based Mortgage Choice broker Shawna Lavis says the fundamental difference between boosting your superannuation and getting your mortgage balance down, is whether you are looking to either pay down debt now, or plan for retirement later.
“I think there's no single right answer. It's more of an idea of which bucket should you be addressing first, or which bucket should you be filling first?
Homebuyers tend to want to focus on their home loan. Picture: Getty
“And it comes down to the person's age and stage really. I generally find that clients are wanting to pay down their mortgage as quickly as possible.
"I work with a lot of first homebuyers, they are positioning themselves to have their mortgage paid off fully, well before retirement.”
Income vs loan size
The size of your mortgage relative to your income is also critical, Mr Wemyss says.
“If the loan is large compared to what you earn, prioritising repayment usually makes sense,” he adds.
“However, if the mortgage is relatively small and you are confident it will be cleared well before retirement, directing more surplus cash into super can be the better long-term strategy.”
When it comes to thinking about paying down your home loan, extra repayments give mortgage holders an opportunity to save tens of thousands, if not hundreds of thousands of dollars in interest, Ms Lavis explains.
“Just by making small, mindful moves, even if it's repaying an extra $50 a week if you can, there's a big impact on that,” she says.
While Ms Lavis emphasised as a mortgage broker, she does not provide financial advice she can provide options to clients wanting to get ahead financially on their mortgage.
“We might suggest that they perhaps split their mortgage into two splits, a smaller split and a larger split, with the larger split having an offset account, and they basically attack the smaller split by making additional repayments on it,” she says.
“That way they're paying down their mortgage a lot quicker. And once that smaller chunks gone, we can then address another split, basically.”
“Putting extra repayments into that can definitely help boost their retirement.”
An individual situation
Ideally, the goal is repay the home loan in full by retirement, while also building the largest possible super balance along the way, Mr Wemyss says.
Extra payments into your superannuation can make a huge difference. Picture: Getty
“At some point, typically once your super balance reaches somewhere between $250,000 and $500,000, investment earnings become more important than new contributions in driving long-term growth,” he says.
“From that point on, compounding does most of the heavy lifting. In that sense, there is a race to reach a meaningful super balance early, because the sooner you get there, the more powerful compounding becomes over time,” he adds.
In practice, the emphasis depends on the client’s situation.
“If someone has a large mortgage relative to income, say $500,000 to $1 million or more, I will usually prioritise reducing the home loan over making additional super contributions," Mr Wemyss says.
Each homeowners is in a different situation. Picture: Getty
“Conversely, if the mortgage balance is relatively small, for example under $200,000, I would generally be more inclined to focus on maximising super contributions.”
And finally, Mr Wemyss says while it is great to focus on additional mortgage repayments and super contributions, neither mattered if your cash flow is not under control.
“Cash flow management is the engine of wealth accumulation.
"This means having a clear cash flow management system that allows you to spend consciously and avoid wasting money on expenses that do not meaningfully improve your standard of living.”
This article first appeared on Mortgage Choice and has been republished with permission.
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