As you reach retirement, it is becoming more common for the everyday Aussie to have a mortgage, thanks to the combination of elevated interest rates and high house prices.

So the question arises, should you pull out money from your Super to pay down your mortgage, or continue your mortgage repayments as normal?

When you reach the full retirement age of 65, most individuals will convert their super into an income stream to live off or to supplement the aged pension or any other benefits.

If you still have a mortgage, you can withdraw a lump sum from your super to pay down your mortgage or to reduce the balance. You can do this by either paying the balance directly off your loan and clearing the loan, or parking it in an offset account to reduce the interest paid.

Alternatively, you can stay the course and utilise your super as an income stream and continue to pay your mortgage repayments as per normal.

So which is best and are there benefits to either approach?

We get this question a lot from our clients. Ultimately, the answer cannot be predetermined as it depends on a several factors:

  1. current interest rate
  2. your net super earning rate
  3. cashflow
  4. impacts on the age pension
  5. access to capital

Let’s delve into the advantages and disadvantages of accessing your super to pay down your mortgage along with the impact on the abovementioned factors.

Interest rates vs net super earning rate

When withdrawing money from your super to pay down your mortgage, you are essentially saving home loan interest costs. The higher the interest rates, the higher the savings.

However, in return, you will be losing the earnings on your lump sum in super. So it becomes a case of weighing up which is more economical for you – saving the interest or losing the earnings?

Put simply:

If your net earnings in super are less than the home loan interest rate, you will better off withdrawing a lump sum to repay your home loan or hold in an offset account.

Super earnings < home loan interest rate = withdraw and pay down your mortgage.

If the net earnings within super are more than the home loan interest rate, you will be better off maintaining your super income stream and paying your home loan as normal.

Super earnings > home loan interest rate = do not withdraw super to pay the mortgage.

It is important to remember here the difference in fluctuations between interest rates vs super earnings.

As a general rule, interest rates are a lot more predictable and less fluctuant than super earnings. Super earnings can dramatically change from year-to-year so can be a lot harder to predict.

An example:

Mary (age 60) has just retired with a super balance of $500,000 and an outstanding home loan of $300,000. At retirement age, Mary withdrew a $200,000 lump sum to reduce her home loan.

Over the next year, Mary’s home loan interest rate is 6.34%, and her account-based pension has net earnings of 4.2%.

After 1 year, Mary is $4,280 better off having withdrawn a lump sum to reduce her home loan, saving $12,680 interest while giving up $8,400 net earnings.

On the other hand, if over the next year Mary’s account-based pension has net earnings of 10% whereas the home loan interest is reduced to 5.9%, she is $8,200 worse off after a year and she saves $11,800 interest while giving up $20,000 net earnings.

Do note: You can see how the decision very much depends on interest and earning rates at the time. This example is also very simplified, not taking into account any movement in home loan balances or pension balances throughout the year. For a completely accurate estimate, consult your financial advisor.

Future cashflow

Separate from interest rates and net earning rates is your future cashflow.

When you access super to pay down your mortgage, your mortgage term will be shorter due to the lower balance. However, it’s important to note that the principal repayment amount will remain the same until the loan is paid out.

In contrast, if you do not touch your super income stream for a lump sum withdrawal, you will have a higher account balance and therefore access to a higher income stream to make your mortgage repayments.

Impact on pension payments

A client’s superannuation is an assessable asset for income test purposes. On the flip side, a home loan does not reduce the value of your assessable assets or assessable income.

Therefore, moving a lump sum from being an assessable asset (your super) to reduce something that is ignored for assets test and income test purposes (your home loan), will have the effect of reducing your overall assessable assets and income.

For those who are well over the assessable asset or income phase-out limit, or those already receiving the max pension, your decision to withdraw or not may have no effect on your pension. Others may receive a vast benefit by withdrawing a lump sum from super to pay down your mortgage.

Speak to your financial advisor about which approach is best for you depending upon your circumstances.

Future access to capital

Access to capital can be quite similar no matter the option you choose. If you retain the status quo and do not withdraw, you will have access to your super balance.

Alternatively, if you decide to withdraw and put in an offset account (as opposed to directly into the loan account), against your mortgage, you still have the option to access these funds if needed.

Final Thoughts

As you may have already attained as you worked your way through this article, is that the answer to this question depends on your individual circumstances at retirement age. Get in touch with our financial planning team if you’d like to discuss the pros and cons of withdrawing from your super to pay down your mortgage.