The compelling reasons to never pay off your home loan

Rates are up, and that probably has you fervently wishing your mortgage balance was further down. And that would sure help. You certainly don’t want a high debt accruing higher interest.

Indeed, owing nothing would be grand, but there are big reasons to keep a mortgage going, rather than seeking to discharge it early.

First and foremost, it’s vital to realise that as you age, your remaining “work time” to repay the mortgage shrinks. Lenders don’t like that – they like “earned″⁣ income.

So – year after year – your ability to get a mortgage slowly disappears. Or at the very least, the loan length that might be extended to you will. But why would that matter if you could potentially achieve debt freedom before retirement?

One word: flexibility. Your life needs or wants could change. Most importantly, you might unexpectedly require access to money, and your mortgage – if you are ahead on repayments – could furnish that.

Or you might simply, suddenly, decide to move home and want/hope to port your existing mortgage to a new property. Remember, you may have the option of downsizing in retirement to discharge any fresh debt. And we will look at a super alternative shortly.

If it’s a pipe dream to clear your debt like this before retirement, though, there is a second strategy available to you.

But, before that, I need to come back to being “ahead on repayments”. To ensure flexibility, you must make all your extra mortgage payments not directly into the loan but into an attached offset account.

This carries the same mathematical benefit as paying into the mortgage itself but with guaranteed access. By contrast, a redraw may need approval, and it may well not be approved if you need the money, say, because you have lost your job.

There is a huge additional advantage to offsets, too: they mean you can safely stash not just money intended as extra repayments but also every dollar you have to your name, including your emergency fund, in case stuff – like a job – does go wrong.

This essentially lets you use all this cash twice: both for its intended purpose and to cut your loan interest.

While you have a mortgage running, offsets are also a good way of managing cash. Some lenders offer up to a dozen separately named accounts for different savings purposes.

So, what happens if you get into the beautiful position of having filled up your offsets to the level of your loan balance? Two things: one, you will pay not a cent more in interest; but two, you will need to continue making repayments – you still technically have debt.

However, you could just make these payments from your full offset accounts, reducing the need for income. (Be aware that if you do this, rather than make them from outside money, it will reduce the cash you have accessible in your offsets.)

If you carry on making them from an outside source, it’s important to siphon the amount that will then be excess to your loan balance into a standalone savings account or investment. Any extra amounts in offset accounts will save you nothing and thus be wasted.

In any case, you’ve effectively paid off your loan but cleverly kept it running – and the money is accessible for any future life flip.

If it’s a pipe dream to clear your debt like this before retirement, though, there is a second strategy available to you: boost your super instead with a view to using it to pay off the mortgage. Because super locks money away, you might consider this only as you approach retirement. Perhaps when you get within 10 years of it.

But the beauty of picking your super over the mortgage for your surplus money is favourable tax – when you pay money into super pre-tax as a salary sacrifice (or claim it as a personal contribution), you lose only the 15 per cent contributions tax. When you put extra money on the mortgage, you do so after tax of up to 47 per cent (including the Medicare levy).

So, you could make far more of your money immediately – on the top tax rate, saving 85c into your super versus 53c onto your mortgage.

Under this clear-your-debt-for-less play, you’d make only your minimum required mortgage payments and then you would put any extra cash not in your mortgage offset account but into super.

But there is a caveat on it: paying off your mortgage is a sure thing; your super is subject to market fluctuations. While your money will most definitely be there in an offset account using the first strategy, with the second approach, your super may be lower when you least want it.

In any case, what happens when you retire or can access your super? You – hopefully – withdraw the equivalent of your mortgage balance from super for it – but, of course, pay the money into the offset account so you keep the loan ticking away and available for you. Just if you later need it.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, X and Instagram.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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