Is paying off your mortgage early the best financial decision?
Paying your mortgage before you reach retirement age is the ultimate milestone for many Kiwis. But could your net worth be higher and your home loan repaid sooner, if you re-invest the equity in your home elsewhere instead? Home loan adviser Christine Hazeldine considers the options.
OPINION: Recent statistics have revealed that fewer Kiwis are entering retirement mortgage-free, with a 10 percent drop in the last five years*. While paying off your home loan first is a great way to lower some of your living expenses once you’ve reached retirement age, it may be worth considering the alternatives.
With New Zealanders continuing to live longer, our period of retirement is also growing. We’re having to ensure we have enough to live on for those often extended golden years.
It’s not in your best interest to begin preparing for retirement once you’re in your 50s (although it’s never too late to start); rather, you need to consider beginning retirement planning as early as your 30s. Paying off your home loan before you reach retirement age means you may require less money to live. But will just doing this alone be enough?
Why putting your income to work is so important
If you have limited funds to save for retirement, paying off your home loan may not be enough.
Having a freehold home, along with retirement savings and KiwiSaver, may not be sufficient when divided by the 20 years or more from finishing life in the workforce – even topped up with New Zealand Superannuation. In other words, you may not have enough on saving income from working alone; you may also need to put your income to work.
If you are earning enough to pay for your lifestyle and save for retirement you may feel you have nothing to worry about. But your savings are not inflation-proof, and let’s face it, most of us live the lifestyle that befits our income. If you want the ‘good life’ now and also when you retire, it’s time to do something about it.
Not all debt is a noose around your neck
Home loan debt is a big part of your retirement planning discussion, but so is making a distinction between personal debt (your home) and investment debt.
If your aim is to grow your wealth, you may reap more benefit from re-considering the function of debt in your retirement plan.
Paying off your home mortgage may give you peace of mind, and it is what we have been taught to do, but increasing your borrowing once you have sufficient equity in your home can potentially enable you to do this more quickly. In addition, it can provide you with a passive income (an income you don’t physically work for) when you retire.
If you want the ‘good life’ now and also when you retire, it’s time to do something about it.
Using home equity to build assets
Every time you pay the principal on your home loan, you are building equity. Equity is the difference between what your home is worth and how much you owe on it. By using the equity you have in your home, you can acquire an asset-based investment. This could help you gain additional assets and allow you to earn either a passive income from rental, or assets you can sell to recover capital gain in your retirement.
The only way you can access the capital gain on your home is to sell it, but then you need to either buy another on the same market losing the capital gain you’ve made, downsize, or move to a different location where housing is cheaper.
I became single again in my late 30s and used this option to build my financial wealth. It had become apparent I had to quickly recoup my losses and make up for lost time if I wished to have a comfortable retirement.
I grew the equity in my home and leveraged it to create a basket of rental income. Whether you prefer the property market or an investment fund, you need to make your money work for you to make more financially than you can make by earning alone.
Saving is often not enough, as it is not inflation-proof, and the income you make from this (by way of interest) is fully taxed.
Using expert advice when building assets
Increasing your wealth doesn’t have to be painful, but you do need to tap into expert advice to help you navigate the risks involved.
If you would like to understand better about what type of investing is best for your circumstances and goals you can talk to a Financial Adviser here at Lifetime. And should you choose to build your assets in property, a Lifetime Home Loan Adviser can be your advocate when dealing with the banks; because they understand the market, they can optimise your loan structure to pay off your home loan quickly and provide you information on maximising any associated tax benefits.
As you prepare your retirement nest egg, it’s important to remember that a mortgage doesn’t need to be a noose around your neck, it can be a tool to achieve your goals sooner.
Christine Hazeldine is a mortgage adviser with the Lifetime Group. Based in Christchurch, she has a wealth of experience in finance, banking and mortgages. She combines her strong analytical mind with her love and empathy for people to help them best plan for their future.
*According to OneRoof Property Report 2019.
Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular investor’s objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.
This week the Government announced a suite of new policy with the intent to assist first home buyers into the market. This included tax changes for investors, bright-line extensions and increases to the cap on First Home Loans and First Home Grants.