If your financial plan is going to, well, plan, then you might find yourself with several options available regarding how you can best utilise your accumulated wealth.
One such option is using your superannuation to pay off some, or all, of your mortgage. This is a question many people ask; it’s certainly a tempting choice.
For many, owning their own home is the truest indicator of financial freedom and is something that is appearing less and less achievable for many younger generations. But if you’ve got the means to wipe your mortgage clear, should you go for it?
Let’s say you’re in a position where your wealth is secured, you’ve got diversified investments, a solid retirement plan and more than enough in your superannuation. How can you tell if you should dip into that super to pay off your mortgage and finally live life on your own terms?
Before you call your bank and pop the champagne, this isn’t a choice to be made lightly – there are several essential aspects to consider.
Assessing your finances
First, take time to assess your financial situation. If you’re working with a financial planning team like our experts at Step Up, they’ll be able to provide you with a clear appraisal of where you’re at financially (and they’ll also be able to guide you along the way if you do opt to pay off your mortgage).
But if you’re just toying with the idea and aren’t ready to take the leap yet, you can conduct your own financial evaluation by looking at:
- All your assets such as savings, investments, properties or businesses.
- Any liabilities, like credit card debt, personal loans and the remaining mortgage.
- Calculating your net worth by subtracting the liabilities from the assets to get a sense of your position.
- Reviewing any financial and lifestyle goals you’ve set to determine if paying off your mortgage is a step towards or away from those goals.
If your resulting calculations have been double-and-triple checked, your net worth is strong, your liabilities are minimal and your life goals are in line with being mortgage-free, then it’s time to assess whether you actually can access your super yet.
What regulations or eligibility do you need to know?
The purpose of superannuation is to provide for us once we reach retirement age. It’s not something that has been set up to dip in and out of as we see fit.
As such, there are eligibility factors to consider. If you’ve reviewed your finances and are certain paying off your mortgage is the best choice, your next hurdle is to find out whether you’re eligible to access your super.
The ATO allows anyone who has reached Preservation Age to access their superannuation without penalty, or those who have been approved to access it early due to circumstances like severe financial hardship.
There are several conditions that one can meet in order to be approved for early release of their super. These commonly include:
- reaching preservation age and retiring
- beginning to retire after preservation age through a transition-to-retirement income stream (an important note here: you can only access up to 10% of your super balance if you’re still working between the ages of 60 and 65)
- leaving employment on or after you turn 60
- being aged 65 years or over, even if you aren’t yet planning to retire
If you meet one or more of those conditions then you are eligible to access your super. And at this point, we recommend contacting a financial planner to discuss how to action your plan.
What are the benefits of paying off your mortgage?
Owning your own home once you retire is the most ideal asset to have, and is a goal we like to encourage our clients to aim for.
Homeownership is one of the key contributors to a comfortable retirement lifestyle and can also allow you to stop working sooner than you might’ve planned to.
So whether you’ve retired already or it’s on the near horizon, any financial move you make that gets you closer towards paying off your mortgage is likely going to be beneficial. Retiring with large amounts of outstanding debt is not advisable.
However, there are risks involved in using your superannuation to reduce or pay off your mortgage.
One of the biggest risks involved is simply the fact that any money you take out of your superannuation now means less money for you in retirement.
For some, taking too much out of their superannuation might mean they need to work longer, sell off assets to access equity or reassess their lifestyle costs, even if it’s allowed them to own their home.
This can create an unideal situation where you may be asset rich because you now own an expensive asset, but income poor, as you won’t be receiving any payments from your superannuation.
Of course, there are tax implications too
The circumstances under which you access your super may leave you open to tax implications that hinder your plan if they’re not correctly accounted for beforehand.
If you’ve been able to access your super early on the appropriate grounds, you’ll need to include the amount you withdraw as part of your assessable income in your next tax return – meaning the net lump sum you receive will be less than what you might’ve thought.
Even if you meet the criteria to access your super without penalties, tax will or will not be applied based on the following considerations:
- the age you’ll be on receipt of the super payment
- your preservation age
- whether you’re opting for a lump sum or income stream
- the type of super income stream you receive
- whether the money in your super is taxable or tax-free
- whether you’re receiving a death benefit income stream
- whether you exceed the following caps:
– The defined benefit income cap
– The low rate cap
– The untaxed plan cap amount
These factors impact the tax you pay as well as tax offsets you may be eligible for. Contacting your super fund for these details will be essential.
Next steps
Trying to make financial decisions of this magnitude can feel overwhelming. If you want to move ahead with accessing your superannuation to pay off some or part of your mortgage, here are some actionable steps you can do next:
1. Contact your superannuation fund. Ask them about their policies on early release, including tax implications, associated fees and conditions you need to meet.
2. Contact your financial lender about early repayment options. If you plan on paying it all off in one lump sum, are there any prepayment penalties to know about?
3. Contact the team at Step Up Financial. We can sit down together to devise the best way for you to reach this major financial milestone, or strategise a different – but equally effective – method of paying off your mortgage faster without your super.