This is a question we get asked on a regular basis – can you (and should you) use your Super to repay your mortgage once you hit retirement? What are the advantages and disadvantages of this strategy?
Let’s delve in.
With the rising cost of living and ever-increasing house prices, it is becoming more commonplace for everyday Australians to hold a mortgage once they reach retirement.
The question is, when you reach retirement age of 65 and convert your super into an income stream, do you draw out a lump sum to decrease your mortgage, or continue with mortgage repayments as usual?
What to consider when using super to repay your mortgage
If you decide to withdraw a lump sum from your super, you can do so in one of 2 ways:
- pay directly into your home loan
- Pay into an offset account.
Which is best and what are the implications of both strategies?
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Interest vs earning rate
The main issue to consider here is the difference between the savings made on the home loan interest rates vs the interest earnings accrued on the amount left in the super account. Put simply, if the net earnings within super are less than the home loan interest rate, you are typically better off withdrawing a lump sum to repay your home loan or hold in an offset account. If the net earnings within super are more than the home loan interest rate, you are typically better to maintain your existing income stream and repay your mortgage as per normal.
Put even more simply, if your home loan interest rate is higher than your net earnings percentage of your super account, you will be better off withdrawing a lump sum from your super. If the reverse is true, stick to paying your home loan as per normal.
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Cash flow
When you redraw super funds to pay down your home loan account, you are reducing the amount of cash at your disposal. Alternatively, if you leave your funds within super and repay your loan as per normal, you will have access to a higher income stream to make the repayments.
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Impact on Age Pension
A client’s superannuation in accumulation phase and any account-based pensions are assessable assets for income test purposes for the aged pension. In contrast, a home loan for your principal place of residence is not considered an assessable asset.
Therefore, moving funds from an assessable asset to a non-assessable asset will effectively reduce your overall assessable assets and income.
For some, there may be no impact on the Age Pension – such as those who are well over assessable asset or income phase-out limits or those already receiving a maximum Age Pension.
Others may receive a substantial benefit by withdrawing a super lump sum to directly repay or reduce their home loan due to lower assessable assets and/or income increasing their Age Pension.
Those looking to use this strategy must be aware however, that moving funds into an offset account as opposed to directly onto your mortgage, will see the funds considered as assessable income. If you are looking to use this strategy to reduce your assessable income, the Super must be paid directly into your home loan and not an offset account.
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Future access to capital
Whether you decide to keep your Super as an account-based income or paid directly into an offset account, the funds are generally made available to you as/if needed, in the same way as any other bank account.
However, if you pay the Super directly into the home loan account, you also still may access this via a redraw facility. However, it’s important to note that the amount available via redraw decreases as the loan term reduces and redraw is also unavailable if you switch to a fixed interest rate. There may also be fees to redraw depending upon your lender.
If you do not have a redraw facility on your home loan account, you will not be able to access the lump sum you have paid into your loan account.
We hope this summary gives you a clear indication of the advantages and disadvantages of keeping your Super as an account-based pension or withdrawing as a lump sum to decrease your mortgage repayments.
If you’d like to discuss your personal situation and seek advice on your upcoming retirement, please get in touch with the office and make an appointment.
