Currently about 76% of Australian retirees own their own homes. About 13% of these retirees still have a mortgage.
These ratios are set to change dramatically over the next 10-15 years, with more than 50% of those currently aged 55-60 carrying mortgages, interest rates tipped to rise up to three more times this year and inflation not yet under control.
As you are aware, at age 60 (Preservation Age) you can access your super (subject to meeting all conditions). So turning 60 has become a trigger point for many retirees who see this as the perfect time to slay their mortgage dragon, using super savings to pay off debt and relax.
Whilst this may present as a simple, neat solution to the problem of ballooning mortgage repayments, is it really that easy?
No, it’s not. There are more considerations than just getting the mortgage monkey off your back. As a 60-year-old you are likely to have another 25-30 years of retirement to fund. Just taking your hard-earned super savings and reducing your home mortgage may solve one problem but could limit your options as a result. On the other hand there is also Age Pension eligibility to factor in. As the primary residence is exempt from the assets test, money put into the home might reduce your financial assets (which are also deemed to earn income) and paying the mortgage may increase your chances of receiving an Age Pension. Or it may prevent you from using options such as the ‘Younger Spouse’ rules. There are many considerations, here, so let’s list some pros and cons. We will then explain the case study of Arthur, followed by links to a previous story, so you can see the upsides and downsides in action.
Pros of paying off the mortgage:
- Reduced financial stress
- More control as interest rate rises can no longer change your situation
- Savings in debt repayments
- Your assessable assets reduce and exempt assets increase which could improve your eligibility for, or amount received from, the Age Pension
- Mortgage interest rates could be higher than you receive on your super earnings
Cons of paying off the mortgage:
- If paid off in full, your access to a loan may be cut off forever
- Reduction in savings for income stream needs and/or Age Pension top-ups
- Possible lack of lump sums for emergencies
- Reduced options to manage retirement income over the long haul
- Super fund earnings may outweigh interest repayment levels – your net assets may be lower than if you had kept the mortgage
Arthur goes debt free – and gets more Age Pension
Arthur is widowed, aged 72 and retired, with assessable assets of $615,000, consisting of:
- Super: $530,000
- Bank: $40,000
- Car: $40,000
- Contents: $5,000
- Asset Total: $615,000 (deemed assets $570,000)
He has a mortgage of $160,000 with repayments of $10,880 per annum (current interest rate is 6.8%)
Under the Assets and Income tests, Arthur is eligible for a part Age Pension of $4,590 per annum (or $177 per fortnight) due to the value of his assets.
He wondered if it would be smarter to repay the mortgage, using part of his superannuation, thus reducing the value of his assessable assets.
Arthur’s assets summary (after repaying mortgage from super):
- Super: $370,000 ($530,000 – $160,000 mortgage balance)
- Bank: $40,000
- Car: $40,000
- Contents: $5,000
- Asset Total: $455,000
- Mortgage now $0
Under the Income and Assets tests, Arthur is now eligible for an increased part-Age Pension of $17,070 per annum (or $657 per fortnight), as the value of his assessable assets has reduced from $615,000 to $455,000.
He no longer has a mortgage to pay during his retirement years and has also increased his Age Pension payments from $177 per fortnight up to $657 per fortnight. That’s an increase of $480 every fortnight which equals $12,475 per year – without the stress of steadily increasing mortgage repayments. It’s worth remembering however, that Arthur may have earned (on current returns) around 8% on his super of $160,000 (i.e. $10,800) so that lost opportunity needs to be factored into his decision-making. Also, his new financial assets balance of $410,000 won’t stretch as far as his previous one of $570,000.
Remember Kumar and Carol?
This couple managed things differently. They were able to do so by taking advantage of the ‘Younger Spouse’ rule, whereby they rolled back Kumar’s super into an accumulation fund which means that his super is not accessible at this stage. It resulted in a higher Age Pension payment for Carol, even though it means Kumar’s savings are not currently available to reduce their mortgage. As Kumar is only two years away from retirement, they believe that there is plenty of time to review their decision and recalibrate if necessary.
Debt management checklist
Retirement Essentials’ Head of Advice, Alison Squire, has prepared a four-step checklist for those who are weighing up the pros and cons of paying off their mortgage in the near future:
1. Assess your current financial situation:
Start by evaluating your current financial position, including your mortgage balance, term left to pay it off, current interest rate and your repayments (monthly or fortnightly etc). Take stock of must-cover expenses (e.g. food, electricity/gas, transport, phone and other essentials). Adding these expenses with your mortgage repayments are your non-negotiables. Then think about some of the things you would like to do and how much they cost i.e. eating out, gifts, holidays etc.
2. Understand your mortgage options:
Talk to your lender or mortgage broker to understand the terms of your mortgage and your options, including the ability to refinance, make extra repayments, or change to a different loan product which aligns better with your goals.
3. Emergency Fund:
Do you have or do you need an emergency fund to cover unexpected expenses? Is your mortgage part of this solution?
4. Evaluate your options against your retirement income needs:
Clearly outline your short-term and long-term financial goals:
- Do you want to pay off your mortgage before retirement?
- How much income do you need in retirement (i.e. the non-negotiables)?
- How much income would you like in retirement for those holidays, dining out, entertainment, renovations, etc?
Depending on your current financial situation there could be a number of alternatives you could consider.
Balancing mortgage payments, retirement savings and Age Pension eligibility requires careful consideration and may involve trade-offs. It’s essential to find the right mix that aligns with your financial objectives. A ‘Should I pay off the mortgage’ consultation with one of our financial advisers can provide personalised guidance and help you make informed decisions that support your overall financial well-being.
What’s your preferred strategy?
Do you just want to get rid of debt as soon as you can?
Or are you happy to concentrate on a higher super balance and the need to simply manage the mortgage in the meantime?
I’m puzzled as why the only options considered with regard to paying off a mortgage are all in or all out. My strategy was to pay off all but $100 of my mortgage. I get all the Centrelink benefits from a reduced Super balance, my repayment is $1 per week, my interest is zero (because of offset accounts), and if I ever need it in case of emergency, I can redraw most of my original mortgage balance, so I haven’t really lost access to the money. Yes, I have the opportunity cost that my money could have earned in my super fund, but it would have needed to exceed 7.8% pa after tax anyway to counter the pension reduction from Centrelink under the assets test, so all I’m really losing is any potential earning over this amount.
Could you explore the downsides of this strategy please?
I agree with you Jim. I will be retiring soon and will pay off all the mortgage, bar a nominal amount to keep the account active (with an offset to counter the interest repayments). Just as you correctly pointed out, it gives you an emergency buffer and at the same time provides a lower asset/income threshold to enable access to Centrelink benefits. Also agree that the opportunity cost from not leaving the funds in super is likely to be insignificant compared to the Government pension receipts.
We paid our mortgage down to a zero balance with pre-tax money in my super (approx $150k) This way, we could always redraw on the loan if needed.
I lost my job due to injury, and if we still had the mortgage hanging over our heads, we would have been in a LOT of financial strife.
Yeah, we may have missed out on some interest earned on my super, but the stress was totally eliminated.
In my case, totally worth it.
That’s always been my plan as well Jim, and hopefully Centrelink won’t look at ‘redraw capacity’ and then screw it all up ?
Have adopted the same strategy of leaving Super balance as assessable asset to qualify for full pension (couple- wife has no super) and can draw down from mortgage as needed.
When I retired got hit with extra concessional tax as final payout for the year as it included accumulated annual leave, long service leave, commission, bonus, max voluntary super contribution, proportional super contribution as well as employer contribution which exceeded $250K for the year. Get hit whichever way you try to save.
hello, what should I do? I own the family home from a previous marriage which my daughter still Resides. my husband and i have bought our own home where we reside we have a mortgage of $135k I have super of $125k ..my husband is 66 years of age and not working. I’m 64 and work 7 days a fortnight as a nurse. will we still be entitled to pension when my husband turns 67 . and when I turn 67. ? should I try pay house off before retirement?
Hi Wendy, it’s Sharon here, thanks for your question. A home you own and live in is considered an exempt asset for the Assets Test. Only one home can be an exempt asset. We can work through your scenario and options for you to consider in one of our Strategy Consultations. These 55mins video meetings where we share screens can show you the outcomes of your scenarios. I would be happy to help you if this is helpful, and these can be booked here
I will be eligible for the aged pension next March, I have a reasonable amount in my super account and have retired from full time work. my question is should I roll my super into my wife’s super account be fore I apply for the pension. does my amount in my super effect my ellegabillity for the pension.
Hi Chris, it’s Sharon here, thanks for your question. Having a reasonable amount in your super is a great achievement, well done! Whether you should roll your super into your wife’s account and whether your super effects your eligibility depends on a number of factors, including your wife’s age and what other assets you have. I would be happy to help you with a Strategy Consultation to work through what’s most important to you during a 55mins video meeting to show you the outcome. If this would be helpful they can be booked here