Interest rates are at all time lows, so should you pay off your mortgage or top up your super?
Low rates are making it easier for Australians to reduce personal debt. But is that the best strategy for you?
It’s fair to say many of us have never been in a better position to whittle away our mortgage. And that’s exactly what Australian home owners are doing. Recent figures from the Australian Bankers’ Association found the average household is currently more than two years ahead on their mortgage repayments1.
Many home owners have achieved this amazing result simply by maintaining their loan repayments at the same level despite successive cuts to home loan rates. On the face of it, it’s a sensible strategy. After all, paying off a home loan sooner means enjoying life mortgage-free at an earlier stage and pocketing valuable savings on interest charges.
It is certainly an approach that has been reinforced to home owners over the past decade. However in today’s low rate environment it can pay to think about whether focusing on clearing an inexpensive debt – especially one backed by an appreciating asset (your home) – will deliver the greatest benefits over time for your circumstances.
You see, paying off a home loan sooner make sense. That’s a given. And one of the beauties of remaining with a variable rate loan rather than locking into a fixed rate is greater opportunities to make extra repayments.
The catch is that our home loan is just one part of our personal financial picture, and stacking up savings on a mortgage isn’t the same as building wealth. Similarly, your home won’t provide a source of cash or help to pay the bills in retirement.
That’s why an alternative path worth considering is using the cash freed up from lower home loan repayments to grow super savings.
If you’re not convinced, consider this. Paying more on your home loan could see you pocket savings of about 5% on loan interest. But over the last financial year industry group SuperRatings say most super funds have achieved near double-digit growth – with a median return across balanced funds of 9.7%. Moreover, this was the sixth consecutive year of positive results for super funds, with annual returns averaging 9.2% across the period2.
As a general rule, younger home owners can benefit from paying off their home loan rather than ploughing every bit of spare cash into super. It’s not a mutually exclusive choice though, and making a contribution to the fund of a low income or non-working spouse can deliver immediate tax savings. For home owners approaching retirement, focusing on your super rather than your mortgage could make a significant difference to your retirement lifestyle.
Everybody has different needs and priorities, and it’s vital that you determine the best strategy for you and your family. Talk to one of our financial adviser’s to see which course of action works best for your circumstances.
ABA media release; How well can households cope with increased debt?1 June 2015 at http://www.bankers.asn.au/media/media-releases/media-release-2015/how-well-can-households-cope-with-increased-debt
SuperRatings media release: Super – bad month, good year, 17 July 2015 at http://www.superratings.com.au/_news/super-bad-month-good-year/e66c738a-b90b-4de4-823f-c159dd592966?key=4uEbzl