Why paying off your mortgage is better than negative gearing

Economy

My husband and I are in our mid-50s. We have in our self-managed superannuation fund (SMSF) invested in an apartment worth $550,000, with a mortgage of $190,000, a share portfolio of $240,000 and some cash in a savings account. We’re self-employed in retail and intend to be out of the business in two years, after which, we both intend to work part-time. We own the house we are living in outright. Should we try to clear the mortgage within the SMSF completely with the funds sitting in the savings account, or treat it like an investment property by making minimal repayments?

That long-established desire to have a negatively geared asset to create a tax deduction to reduce taxable income is not always the best option. It assumes the Australian Taxation Office (ATO) is generously doling out tax deductions willy-nilly. It isn’t. You’re only getting a deduction because you are losing money.

The only reasons to maintain a debt are if you don’t have enough equity to pay for your asset, or you have the capital but can earn more elsewhere.Credit:Kerrie Leishman

For example, assume you have lost $100 on a negatively geared asset and thus reduce your taxable income by $100. If you are in the 32.5 per cent tax bracket, plus Medicare, earning between $45,001 and $120,000, you have saved $34.50 in tax, but you have still lost $65.50!

The only reasons to maintain a debt are (a) if you don’t have enough equity to pay for your asset, or (b) you have the capital but can earn more elsewhere – more than the interest you are paying on the loan.

So, unless you can invest your cash better elsewhere, pay off what, I assume, is a “limited recourse borrowing arrangement” (that allows super funds to borrow) and save on the interest you would otherwise pay, which is usually higher than a standard mortgage.

You also need to put a lot more into your super fund as it is presently heavily weighted to property, an illiquid asset that likely produces a low income. If it remains that way, then you won’t have enough income to pay your pensions when you retire.

I’m a 60-year-old divorced female with no dependents at home and working about 10 hours a week. I have $360,000 in super and a $150,000 mortgage on a property valued at $580,000. My mortgage is fixed at 1.88 per cent for another two years. I will be inheriting $150,000. How should I invest it? Should I put a third each into super, my mortgage and a car or holiday? I’m also considering investing in exchange-traded funds but, given the state of the sharemarket, I prefer not to gamble the money away.

I always argue that debt represents a higher risk and also a drain on your retirement savings. Paying off your mortgage removes those risks. Further, in two years’ time, any mortgage interest will likely be significantly higher. Meanwhile, the major stock exchange indices appear to be heading south.

So, find out what it would cost to break your fixed-rate mortgage. Given that the lender can now re-lend the money at a much higher interest rate, I wouldn’t expect any interest penalty.

You should then save your mortgage repayments which, for a principal-and-interest loan, could be about $15,000-$20,000 a year, which should finance a pleasant holiday, after which you should focus on building up your super.

  • 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 own personal circumstances before making any financial decisions.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. All letters answered. Help lines: Australian Financial Complaints Authority, 1800 931 678; Centrelink pensions 13 23 00.

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