Quick, get that home loan paid off
Speculation about changes to capital gains, superannuation and negative gearing tax arrangements is understandably unsettling many investors. How to plan for retirement is rapidly becoming increasingly difficult, particularly for younger Australians.
One younger reader sought confirmation that her best strategy was to reduce her large mortgage as quickly as possible. Her main concern was that interest rates might rise, putting her under financial pressure.
It's difficult to predict what will happen to interest rates, but based on past experience in Europe, the United States and Japan, our interest rates appear likely to remain low and even fall further for an extended period. The recent fall in three-year fixed interest rates to around 4 percent supports this view.
The more important point is whether interest rates rise or fall, by far the most rewarding and tax-effective strategy is to pay off debt on the family home as quickly as possible. This is a far better option than to invest surplus income in superannuation, shares or term deposits. These alternative investments all have drawbacks, such as attracting taxation bills or, in the case of superannuation, being tied up untouchable until at least the age of 60.
The return from paying down a house mortgage is risk and tax free and much higher than that available from safe term deposits and similar investments. As highlighted last week, the federal Treasury has no plans to recommend changes to the taxation treatment of owner-occupied homes, confirming that this is by far the best avenue for investment. Not only does owning your home avoid the need to pay rent, but all the capital gains are tax free.
Speculation about increases in the capital-gains-tax liability on other assets adds to the attractions of the family home as the key asset in any savings. The social security system also increases the value of the family home by exempting this asset from the means test.
If the only asset owned on reaching age-pension age is the family home, whatever its value, the full age pension of more than $30,000 annually for a couple is provided free of charge by the government. Given increased longevity and low available returns, almost $1million of assets would be required to generate this level of income safety. Saving this amount would result in the loss of a large part of this pension.
Given proposals to further limit access to the age pension, the priority for all retirees is to own their house outright before saving additional money. Where taxpayers have both home mortgages and investment loans, reducing the house mortgage first helps minimise personal tax bills and provides cash-flow benefits.