If you have $200k+ left in your mortgage and enough fund to pay it all off, would you…
Sorry for the noob question, appreciate all the advice :-)
This thread is very useful, thanks everyone for the advice.
Really depends on your circumstances.
I will be doing 2 in the next 2 - 3 years everything going to plan. Wife and I both pay the $27,500 maximum into super each year so 4. is not tax effective for us and we will have a more than adequate amount in superannuation when it can be accessed.
Could do 1, but there is no direct cost to keep the loan open and have flexibility. Will probably do that after building sufficient cash post having enough in the offset to cover the loan balance.
No idea would anyone would choose 5 over 2. In 5 you earn say 5% and pay tax on it vs sticking it into an offset and having the interest reduced with no adverse tax consequences. Interested to hear of any situations where 5 would be better than 2.
Guaranteed return by either paying off or using the offset. Let's say you offset a 6% interest rate you are effectively earning around 10% as the return is not taxable.
To get 10% any other way involves risk and quite a bit of it.
I would maximise the superannuation concessional contribution each year, then the rest into the offset account.
Paying off the mortgage is not a good idea in an environment where lending is getting tighter, especially since you have an offset account which achieves the same thing but keeps the control of the money with you.
Superannuation is taxed at 15%, so you are both saving and cutting your tax rate. Also it's likely your super will invest the money better than you will.
It also depends on your circumstances, if you have secure employment and aren't close to retirement you should consider being more aggressive and investing some
definitely pay the mortgage off - work has a different meaning once you've done that.
I would consider putting some money into super up to the $27,500 limit so you only pay 15% tax rather than 37% or whatever your marginal tax rate is. This will also depend on your age and other circumstances as you won't be able to get it out until retirement.
If people have the funds available, taking advantage of the concessional super contributions every year is worth investigating.
Good old discussion - liquidity vs financial return. Once you’re set with a house it absolutely makes sense in my eyes.
Each person's situation is different.
If you are close to retirement age: I would contribute to the max cap (pre-tax) and use this money for expenses if you are short.
If you have a lower-income partner: I would buy Vanguard Australian Shares High Yield ETF (ASX: VHY). $200K would add about $15K pa to their income.
If you are about to have a family: Keep it in your offset
If you are financially safe: I would pay most to the mortgage. Re-borrow for investing purposes and invest on ETFs covering multiple geography and industries aiming for growth.
Seriously, it all depends on your own situation.
no. 2 means you dont pay tax on the offset interest.
Number 2, live frugally a bit more, save so use the extra saved to invest more passively, either blue chips, dividend paying stocks, a mixture or some ETFs. Based on your age, you just need safer investments and probably any extra bit of passive income source.
Option 1 or 2.
Topping up your super is the worst option . I don’t understand why people would want to put money into super . I want to take mine out ! Luckily i was able to take some out during covid . But would love to take out the rest. Why would you want to lock up your money for around 30 years assuming your 35? Horrible idea
Because even though there were some lean years, some years I earnt between 25% to 32% p.a. It's a tax efficient investment if on a medium to high income and reduces your reliance on the ever elusive pension.
The only years that would have earned 25 to 32% are after the GFC and covid. Any other years would have got on average 7 - 10% . That is also an average . You can also make loses in super like the GFC when people saw their super balances wiped out by half .
Regardless even if you are earning 20% every year ( will never happen) the value of money is being eroded more then what the inflation rate shows . Half a million 20 years ago would have got you a huge house in a inner city suburb . Now you will be lucky to get a unit in a outer suburb . Imagine in another 20 - 30 years half a million will get you even less .
It is always better to help your situation now then to help your situation in the future .
Also another risk if your superannuation fund lose your whole balance in their “ investments” they are not liable and you have no recourse .
IVV (iShares S&P 500 ETF) returned 37% in 2021, 32% in 2019, 25% in 2014, 55% in 2013. The 10 year return till December 2021 was 19% per year CAGR.
NDQ (BetaShares NASDAQ 100 ETF) and IXJ (iShares S&P Global Healthcare ETF) also had terrific returns.
Returns in these US based ETF's listed on the ASX have benefited by about 4% p.a. due to exchange rate (holding US assets, so strengthening USD results in more AUD when converted back to AUD).
Cost inflation for housing has been much higher than CPI, and considerably higher than a lot of consumer goods. Inflation rates vary from person to person, depending on what it is you are actually purchasing. Inflation measurements also vary, eg CPI inflation, Core inflation, etc…
If you are struggling today, then having the money now is of more benefit than in future.
If however you are comfortable now, then investing for the future is generally considered the better option.
On saying that, as you get older you will be unable to have certain experiences (due to health and mobility issues), so having experiences today will be more valuable than trying to put it off until you get older.
I would think a balance between living it up now, whilst still saving some for your future self would be the best compromise.
As a starting point, option 2 and the remainder after fully offsetting your loan can be put into option 5. If you had, say $220k, there's no point in putting more than $200k in the offset. Stick the extra $20k in a HISA. If you manage to figure out an investment option that has a higher ROI than the HISA and you're OK with the risk, then you could consider that.
I personally wouldn't invest the money in the offset account… but that's my own personal preference on risk taking. Having your loan fully offset is a pretty good position to be in.
I would not go with option 1 in the event you move out of your home and rent it out. You'd have to be very sure about not renting out the property ever and probably have some high loan admin fees to consider Option1.
Pay off the mortgage before you loose it all on a shoddy investment or get scammed.
As you mentioned most people suggested option 2. The reason for this is it equivalent to a guaranteed 9% or so return. The also suggested that it gives you some flexibility which is true. But, consider this, to make use of the flexibility, you need to withdraw from the offset account, and by doing this you loose your guaranteed 9% return on that sum withdrawn. Also, as Logical just mentioned, it would be a shame for you to build up your offset account only to find one day someone had ported your mobile number, then gained control of your email, and then changed your banking password and emptied your offset account. I say pay off the mortgage and be done with it. Going forward, you will outlay nothing every year to interest or mortgage payments which you instead use the interest savings to build up an emergency fund faster. Every year you don’t have a mortgage is the equivalent of receiving an investment return, not in taxable earnings but in interest savings instead which is harder to see since it’s invisible in some respects. If you have the capacity get rid of your debts just do it.
Do you earn interest in your offset account? If not why leave it in there. If you dropped your 200k in a HISA, you can still pull the money out in most circumstances but possibly lose the initial interest rate set.
@OP are you on the upper end of the 32.5% take bracket that may tip you over to the next?
Because they save interest off the home loan with an offset account?
What is this HISA and is the rate higher then 5.79?
Because you pay tax on interest earned, but not on interest saved…
If you save 6% on $XXXXXX, that's all money in your pocket (so to speak). But if you earn 6% on $XXXXXX, the tax man will take his cut, making it more like 4% in your pocket…
As other's have said, the break even point is around 9-10% earnings currently, if you aren't subject to any other income tests.
I've never really understood people that kept a mortgage open just for the redraw. You're just paying fees and interest, AND psychologically are saying "it's ok I don't need to be frugal my mortgage is basically paid off". This is an important factor to consider - complacency
If your mortgage rate is lower than a HISA, go for that. Don't forget to account for tax in interest earned
I certainly couldn't give investment advice right now. Indicators show that we should have had a GFC around 2020, but we did a small dip for covid and are now at all time highs. We're in a per capita recession, as is most of the western world, and that's with loose credit
Many mortgages once set up have no ongoing fees, so if you're offset balance equals your loan balance, you pay nothing at all, while retaining the convenience of being able to access your money at any time, for any reason.
Paying interest on a mortgage while keeping money in a HISA is a bad choice for 99% of people, unless the HISA is returning over 160% or so of your mortgage interest.
Fair enough regarding the no mortgage fees (I'm certainly paying annual fees)
My "psychological" point still stands - people will start to see that redraw as "cash" rather than debt, because it's so easy access. That of course depends on the individual.
My parents and in-laws are both redrawing (due to boomer gained equity) but I'm concerned that they're not adding value with the amount redrawn, and retirement ie loss of income comes at you fast
Regarding HISA - depends on your rate. I have 2x years locked in at <2%, so my excess cash is chasing safe interest. If your variable rate is 4%, and you can get 5% on a HISA, it could be worthwhile depending on income tax.
I'm currently taking advantage of 0% purchase credit cards and balance transfers, and HISA. Once again, I wouldn't recommend this strategy for people that conflate "credit" and "cash"
Consider number 1.
Pay off the mortgage (or if you have an offset account to have the cash in it to offset interest repayments and let it pay off slowly).
I'm sure you've thought about what you could do if you didn't have a mortgage, go and do that!
200k, defs a trip on the titan to visit the titanic
I like number 2 and would do that if I got what I owed in cash, leave it in the offset, while continuing to make the payments I make now (P+I x 2), in theory if spending habits are the same, mortgage paid off in well under a decade and still have 200k at the end. As the owning amount gets lower and lower and interest on that amount becomes more trivial, I'd consider alternate investments. I definitely like the idea of completely cutting off paying interest, while still leaving the money liquid - it's possibly not the most maximised way to make your dollar go as far as it can, but it's far from daft, and very low risk/low effort.
I’m currently offsetting quite a bit of my mortgage and also paying extra contributions (me and husband we are both 51). The interesting thing is that a friend who is 48 went to see a financial advisor for his situation. He owns an investment property (and main residency it’s free as he lives in parents house) The advisor recommends to pay off the investment property, rather than super…. I think that is strange advise as he won’t be able to maximise the mortgage interest offsetting for being an investment property. The advisor was saying you can’t touch super until you are 67, which also seems incorrect. My understanding is that you can start accessing it at 60 and even use it to make extra contributions….
My friend’s situation might be different but the advise seems odd.
Of course buy more properties. That's what everyone else doing.