I’m 35 and own my own apartment. I recently received some early inheritance from my parents which was contributed towards my mortgage. This has left me with a relatively small mortgage of $150,000.
Considering my age, should I focus on paying down the mortgage as quickly as possible to be mortgage-free? Or should I use the savings to invest elsewhere, eg. in my super or in an ETF portfolio?
The first thing to note is that there is no definitive wrong answer here. It largely comes down to your risk appetite and goals.
If you focus on paying down your mortgage, you’re guaranteed to save the interest rate on the debt. Currently, that’s about 6 per cent, and unlike an investment, there are no tax consequences. Reducing debt, or even becoming totally debt free, also improves your resiliency and provides you with extra flexibility in life.
As you mention, however, perhaps with your mortgage having been reduced, you could cut back on your repayments and deploy that cash elsewhere.
Depending on your level of income, current super balance, and retirement plans, some salary sacrifice to super might be beneficial, as it will produce a tax saving, and strengthen your retirement outcome. The trade-off with super is that you lose access to your money until at least age 60, so you need to consider your need for flexibility here.
Non-super investments have the benefit of access at any time. You could even re-borrow against your apartment given you now have plenty of equity in that property, and use that to kick off a new investment, with the investment income then used to make additional repayments on your home loan.
This is a process known as debt recycling and whilst it is sometimes oversold as a strategy in my view, it can nevertheless produce positive outcomes if you have an appropriate time frame and a well-constructed investment portfolio, particularly for those in the top marginal tax bracket.
I am a 51-year-old single mum of two children (16 and 18). I earn $94,000 a year and have a mortgage on my home of $220,000 (my home is worth approx $830,000). I have $160,000 in super and $380,000 in shares.
What do you think I should do in terms of setting up my financial future? Would you recommend me to sell some shares to lower my mortgage? I feel like I need to take some action, but I have no idea where to begin.
Assuming you aren’t finding the regular payments on your mortgage too challenging, then selling shares to reduce this debt doesn’t jump out at me as an obvious strategy move.
Doing so will probably trigger capital gains tax on the shares, which then reduces the amount that can be paid off the mortgage to produce an interest cost saving.
On the numbers you have provided, it looks like superannuation would be the place to focus your attention. Perhaps you could use the dividends from the share portfolio to help with living costs, and then salary sacrifice from your wage into superannuation.
This would boost your retirement savings in a tax effective way. Check the investment option in your super fund too. You have a nine-year plus time frame, so you can afford to be aggressive.
Post retirement, when your income is low, you could explore selling some of the shares and boosting your superannuation, with capital gains tax considerations being at the forefront of determining the optimal solution.
Paul Benson is a Certified Financial Planner at Guidance Financial Services. He hosts the Financial Autonomy podcast. Questions to: paul@financialautonomy.com.au
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their personal circumstances before making any financial decisions.
Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.
Paul Benson is a Certified Financial Planner, and host of the Financial Autonomy podcast.
