For years Australian retirement was so very straightforward.
You work, you live in the city, you pay off your home loan.
Then at retirement, you just go for a half-year trip along the coastline,
care-free, debt-free sounds like a very happy retirement.
Now, when the property prices have risen so much, not only it is more difficult for younger generation
to buy their first home, but it is also more difficult for older generation to pay off their home loans.
Therefore, the number of retirees have to face the fact of having their mortgage
when they reach retirement age.
So why is this happening that more and more people face to enter retirement
with the mortgage still not fully paid off?
And is withdrawing funds from your superannuation an answer?
My name is Katherine Isbrandt from About Retirement. I'm Certified Financial Planner.
And you are watching AboutRetirementTV the place to get all the information you need
to get ready for your retirement or to improve your financial outcomes if you have already retired
So let's try first to find the answer to this question: Why is it more difficult to pay off home loan now than years ago?
1. Higher property prices
this is a pretty obvious reason.
Well, it takes now 10 times the average wage to service the loan comparing to 3 to 4 times 20 years ago.
2. Delaying entry.
The high property prices in many cases delay the entry time to buy a family home,
therefore, it leaves fewer working years to have it paid off.
3. Lifestyle
I think these days it is also different ways of looking at life and our priorities.
20 years ago, a couple would sacrifice their lifestyle to the maximum
to have their home loan paid off as soon as possible.
But now we look at home loan as one of our responsibilities
but at the same time we want to have life, we want to have holidays, nice things in a house,
social life, that is reducing our capability of additional repayments.
And 4. Current low-interest-rate environment
Well, maybe that does not apply to everyone but most certainly some people are taking advantage
of higher earnings from shares or superannuation or even investment properties,
with all providing a great deal of tax benefits.
So now that we know reasons behind having a mortgage when facing a retirement decision
the question is what to do?
When getting ready to retire, most likely the last thing you want hanging over your head is that loan.
After all, when you stop working, there is no more income, so it is only logical that repaying whatever loans you have
would bring you a great deal of peace of mind and feeling of security,
but financially, is it a wise decision? Is it better to reduce the value of your super to be mortgage-free?
The answer is not as straight forward as you would like this to be.
Why? Well, each one of us is different and we want different things
therefore, different things are making us happy or worried.
And this is the bottom line why there is no straight answer.
So let's review what I mean.
1. Your Interest payments vs Superannuation earnings
One can argue very successfully too, that there is no point in repaying that mortgage,
as most suddenly a super can earn more than the mortgage repayments.
From purely math's and calculations perspective, it might be correct:
If your super fund is earning 6% but your mortgage is charging an interest of 3%,
you are still 3% in front.
However, please don't forget that if your savings are in a super - accumulation stage,
there is still 15% tax, payable on that 6% return.
Therefore, it is no longer a return of 6%, but probably closer to 5%. Still higher, but those returns are not guaranteed,
therefore, you could have years of negative returns and then your loan repayments are really costing you.
2. Cashflow.
If your cashflow is not sufficient to sustain those monthly mortgage repayments,
then it becomes not only difficult to meet those repayments
which could lead to issues with the bank, which then introduces a great deal of personal stress.
3. Age Pension.
If you have reached your Age Pension age, your mortgage against your home is not really providing you with any benefit.
Because your home is exempt asset under Income and Assets test, so is your home loan.
Centrelink does not care about your financial issues because you still have your home loan running.
But if you have savings in super, in pension account, or even in your offset account,
those are all counted under Income and Assets Test and that will reduce your Age Pension eligibility accordingly.
If you are unsure how much your Age Pension could be reduced under either of those tests
just watch my videos the "The truth about Assets Test" and "Age Pension Income Test madness"
So what's the verdict? Well, it is all up to your decision but after 20 years of working
and advising retirees, I believe that if you are in a situation of retirement with a mortgage and
good superannuation savings then you have those choices;
1. Withdraw from super and pay off the loan
I actually list this as one of ways to improve your retirement so watch this video
"31 ways to Improve Retirement Planning Part 1".
Paying off your mortgage will not only help you with your cashflow,
yes, it will be lower but you can adjust your life and you can start living within your means,
but at least it will be a reliable income.
But even a bigger benefit is feeling of safety and security,
knowing that your home is really yours and no bank will ever take it away from you.
If you wish, which I think is not a bad idea, keep your loan facility open,
it might help you in the future if you need some extra funds for emergency but it is only a good idea
if you are not a spender and if you can control and budget your expenses.
But obviously you need to meet specific rules in order to be eligible to withdraw from your super
such as reaching your preservation age.
If you don’t know what that is, just watch: “When can I access my super, please”
2. Downsizing.
I believe for some people this might be the best idea, your home has gone up in value considerably over the years.
But now, that kids left, who needs all that space.
An idea to sell might be a blessing, not only it is exciting to start fresh,
but by selling you can pay off your loans, so there is no need to withdraw from your super, and
maybe there is some money left over, then you can benefit from downsizer contributions,
if unsure just watch my videos:
"Downsizer contributions to super - part 1 - Rules" and "Downsizer contributions to super - part 2 - Who can benefit"
Whichever way you choose is best for you, get the full financial and retirement advice,
if for no other reason to compare those options to see where you end up financially most secure and happy.
But please leave me a message and question or your thoughts below my video
I will reply personally as quickly as I can.
I hope you enjoyed our today's chat if so please hit that LIKE button and SUBSCRIBE to this channel
not to miss my next video.
Also feel free to check out my website AboutRetirement.com.au
that is fully dedicated to all issues that people who are getting ready for retirement
or those who have retired face every day.
And while you are there consider signing up to my newsletter
to be updated weekly about all the changes that can impact your retirement plans.
Also, if you have a question or would like to set a private consultation,
just send me a message directly from my website it is easy and I will respond within couple of days.
And now it is recommendation time, please continue watching my videos and learning what to do to improve your retirement.
The first recommendation is previously mentioned
When can I access my super? - very important to
understand that your superanuation is not your bank account.
The second recommendation is
Downsizer contributions to super – Rules
and after that watch continuation of this topic
- Who can benefit.
I will talk to you in my next video. Bye