29
Jun

Extra Mortgage Payments OR Super ?

Should I make extra Payments on my Mortgage or put the money into Superannuation?

We all know that it makes sense to pay off your mortgage in order to own your own home. This is a clear priority for many of us as part of our strategy for achieving financial security. We understand that the interest that we pay on our mortgage needs to be paid, but if we make extra payments, this reduces the principal component of our loan and thereby reduces our overall interest obligation over the loan term.

Many of us also understand the benefits of contributing surplus funds into superannuation because of the very generous taxation concessions when funds are contributed, as well as the concessional tax on earnings (tax free in pension phase) on funds, benefiting from compounding returns over time in the superannuation environment.  I am often asked by clients whether or not they should use surplus funds to reduce their mortgage or add the funds to superannuation. There is no one correct answer as individual circumstances will dictate which is more appropriate or even if a combination of these strategies make sense.

A factor to consider, will be the needs of an individual to access their saved funds and over what timeframe. Also important will be the relative age of investors and their proximity to retirement when deciding what may be appropriate considering the superannuation preservation rules.

I have provided below an illustration comparing these alternative strategies based on a theoretical scenario with a range of assumptions to give you some idea of how each strategy compares financially over time.

The Scenario

I have assumed an individual with a $300,000 mortgage and remaining loan term of 20 years, paying interest of 6%. In this case I have also assumed the investor is 45 years of age with an income of $80,000 per annum plus superannuation (SGC) and can afford to make a $500 per month contribution to superannuation or use these funds to reduce their mortgage.

The illustrations below highlights the difference financially when comparing these alternatives up to an assumed retirement age of 65.

In this case the investor would be $28,409 better off at age 65 by investing the spare money into super.

Super-Graph

Calculator Source: ASIC’s Money Smart Website: www.moneysmart.gov.au

There is not a one size fits all answer, and individual circumstances will be important to consider, however the answer to the question, “should I pay off my mortgage or add more money to superannuation?” may well be quite different to what you are currently thinking.

Calculator Assumptions :

  • Inflation of 3.5%
  • 7% net investment return
  • Mortgage interest rate of 6%
  • Mortgage of $300,000 remaining to be paid over 20 years.

Should you wish to discuss what strategy would be best suited to your specific needs or if you require assistance with any other financial planning matter, please don’t hesitate to contact our office on (07) 3891 5666

signature_xan

 

 

 

Alexander(Xan) Kitchin CPA, BBus(Acc), BEcon

Senior Financial Planner & Princpal at Wealth Connexion Pty Ltd

Important Information:  The information in this document is of a general nature only. Before you make an investment decision you should assess for yourself or obtain professional advice on whether the information is appropriate for your particular investment objectives, financial situation and particular needs.

29
Jun

How Does Low Interest Rates Effect Shares ?

The bank deposit interest rate war has virtually ended. Ubank has now lowered its one-year rate to 2.9 per cent, Westpac to 2.4 per cent. Banks are lifting their margins by giving their savers a belting around the head.  Markets are telling us that on the interest bearing securities front, yields are going to be low although there will be some rise in the US.

Low interest rates effectively means Aussie banks will move earnings from their customers to their shareholders and this could allow bank shares to rebound over the next few months.  As the world scrambles for yield in this tough environment Aussie bank and other industrial share yields will look very attractive… The world renowned investor Warren Buffet is looking around at our high yielding stocks !

Citibank is forecasting the Australian S&P/ASX200 index will rise to around 6,000 and while this article is for general interest and should not be taken as advice (and I am not making any predictions)  the interest rate environment is very conducive to such an increase.

What is more dangerous to Australia is, of course, what is happening in China. Chinese economic growth has slowed considerably but despite this the Chinese share market has skyrocketed this year fueled by a  frenzy of lending. BUT in the last week or so the Chinese market has fallen 13 per cent.  At this stage a 13 per cent fall is a warning sign but it is not severe enough to rule out a recovery.  Australia has a very big stake in what takes place in China.  Our resource shares are very much linked to China.

So what the markets are telling us is that while our high yielding shares may do well … our mining shares may not.

Important Information:  The information in this document is of a general nature only. Before you make an investment decision you should assess for yourself or obtain professional advice on whether the information is appropriate for your particular investment objectives, financial situation and particular needs.