Australians are taking a smart approach to their mortgages, with Reserve Bank of Australia (RBA) figures showing home owners are, on average, 2.5 years ahead with their home loan.
The RBA based its findings on the value of money sitting in home loan offset accounts and redraw facilities, which total about 17% of the nation’s collective mortgage debt.
Offset accounts are savings accounts linked to a home loan. The balance is deducted from your mortgage when interest is calculated, thereby reducing the loan interest paid. Redraw is a feature that lets home owners claw back extra money paid into their loan.
Getting ahead with your mortgage is a smart move. It not only reduces the long term interest cost, it can also provide a valuable buffer against possible future rate hikes.
However building wealth doesn’t hinge solely on ploughing money into your mortgage. In today’s environment of very low interest rates, it can pay to look at other ways to use spare cash.
Let me explain. Paying more off your home loan will see you save interest of, say, 4.5% (or whatever home loan rate you are paying). Yet over the last five years, balanced super funds have earned an average return of about 6.8% annually. So using spare cash to make additional contributions to super can potentially see your money earn a higher long term return, but it is locked up until you reach 55 plus.
The government’s MoneySmart website has a Super versus mortgage calculator that helps you work out if you are better off putting spare money into your super or your mortgage.
You could consider investing spare cash into assets that will build wealth while also provide ongoing returns you can access today.
There is a whole world of shares, managed funds and exchange traded funds to choose from that provide an indirect stake in assets like commercial property, Australian and international shares and even infrastructure like roads, rail and airports. Many of these investments have historically delivered returns around double today’s home loan interest rates.
Happily, it’s not a case of achieving one or the other. Home owners can still get ahead with their loan and also grow separate investments including super. It’s all about finding the right balance. Mind you, if you are in doubt, paying off your home as quickly as you can is a really great plan!
Source: AMP April 22 2016
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.