Since it's inherently riskier, investing in something like the stock market gives you the potential to earn more money than you would save paying off your mortgage early. You're increasing your future wealth.
Paying off your mortgage early frees up that future money for other uses. While it's true you may lose the tax deduction on mortgage interest, you may still save a considerable amount on servicing the debt.
The average time to pay off a mortgage in Australia is between 10 and 30 years. Since Aussies usually buy their first homes in their 30s or 40s, they generally pay them off by their 50s and 60s, but it's becoming increasingly common for people to still have mortgage payments to make into retirement.
Investing extra cash is generally a good idea if you're younger and you may want to consider an investment strategy that could allow you to retire early if you wanted to. But if you're closer to retirement and in a stable job, topping up your super could be a better option.
You should aim to have everything paid off, from student loans to credit card debt, by age 45, O'Leary says. “The reason I say 45 is the turning point, or in your 40s, is because think about a career: Most careers start in early 20s and end in the mid-60s,” O'Leary says.
Using one of these options to pay off your mortgage can give you a false sense of financial security. Unexpected expenses—such as medical costs, needed home repairs, or emergency travel—can destroy your financial standing if you don't have a cash reserve at the ready.
What is the most significant downside of paying off your mortgage early? The biggest drawback of paying off your mortgage is reducing your liquidity. It is far easier to get money out of an investment or bank account than it is to get money from the equity you've built in your home.
Savings in super can do more
When you save money in a regular bank account, you're earning interest at a fixed rate. In super, you have access to lots of ways to invest your savings, giving you more options that could earn a better return and see your savings grow faster.
The maximum you can contribute is $300,000 or the sale price of your home, whichever is less. You may make more than one contribution, but the total must not exceed this maximum. You may contribute less than the maximum.
Paying off your mortgage early is a good way to free up monthly cashflow and pay less in interest. But you'll lose your mortgage interest tax deduction, and you'd probably earn more by investing instead. Before making your decision, consider how you would use the extra money each month.
The super can be used to make payments to your home loan or to pay council rate arrears. Any super you withdraw for this purpose will be taxed and the tax amount will be deducted from the lump sum.
Regardless of the amount of funds applied towards the principal, paying extra installments towards your loan makes an enormous difference in the amount of interest paid over the life of the loan. Additionally, the term of the mortgage can be drastically reduced by making extra payments or a lump sum.
Once your mortgage is paid off, you'll receive a number of documents from your lender that show your loan has been paid in full and that the bank no longer has a lien on your house. These papers are often called a mortgage release or mortgage satisfaction.
Sometimes paying off your mortgage faster is a great way to save on interest and accumulate wealth. But it's always a good idea to look at your complete wealth building strategy and make sure you're not missing opportunities to build wealth elsewhere.
Lost super is super money held by superannuation funds. You become a ' lost member' and your super becomes 'lost' if you are: uncontactable – the fund has lost contact with you and your account hasn't received a contribution or rollover for 12 months.
This can be done via salary sacrifice or via tax-deductible contributions. Normally the cap on this is $27,500 per year (for 2021-22), but because their super balance is less than $500,000, they can contribute more using the 'carry forward' contributions rules which I have previously covered.
The Association of Super Funds of Australia (ASFA) claims it's $640,000 for couples and $545,000 for singles. The reality is most Australians retire with far less in super. Indeed, the average super balance for Australians aged 60-64 is just over $300,000. That may be enough.
According to the ASFA Retirement Standard, a couple can live a 'comfortable lifestyle' with a retirement balance of $640,000 while singles can enjoy the same with $545,000.
ASFA estimates people who want a comfortable retirement need $640,000 for a couple, and $545,000 for a single person when they leave work, assuming they also receive a partial age pension from the federal government.
It's often more beneficial for newer owners to be aggressive with their mortgage payments. This is because your money is typically going towards the interest on the loan, not the principal itself. This means that any extra payments will reduce the total amount of interest owed over the course of the entire loan.
Typically speaking, it's likely that your savings rate will be lower than your mortgage rate, which means you'll be paying more in mortgage interest than you'll be earning from your savings.
Most people should pay off their mortgage before retiring
While different results can come with different outcomes, the analysis found that most retirees would benefit from being mortgage-free by the time they retire. This has a number of benefits, such as: Providing peace of mind. Offering you access to a large asset.
It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to save yourself from paying more interest later. If you're somewhere near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.