How your house can be your retirement plan

 

Many people think paying off your mortgage is dead money, but it could be your retirement plan.

In fact, you should make it a priority to repay the family home as a ‘property investment’ over all other forms of investment, says wealth adviser Simon Hepple, of Pie Funds Management Ltd.

“People think it’s dead money if they’re paying off their mortgage and not saving for retirement,” he says. “But in fact, there are three great reasons to pay your mortgage off first.”

1. The security of your own home

The biggest factor, Hepple says, is the safety and security of owning your own home, which means you’re never at the mercy of a landlord.

Having a mortgage-free home at retirement means you’ll always have somewhere to live, so you won’t need to pay rent at a time when you’re not working.

2. You’re effectively saving at a higher rate of interest than if you had money in the bank.

Another big reason is the interest rate you’re saving, if you pay off your mortgage instead of investing that money for a return.

If you put that money into an interest-bearing bank account instead of paying off the mortgage, you’d have to pay tax on your return.

 “So, if you’re paying a mortgage at 4.5%, and you’re on a 33% tax rate and invest money into an interest-bearing deposit, you’d need to be earning 6% or more to get the same after-tax return.

“This is a very hard return to get in this period of low interest rates.”

3. You can grow your asset

Another advantage is that you can boost the value of your asset by doing renovations or sometimes by doing absolutely nothing at all.

“If you add value to your property, it could be worth a whole lot more at retirement than it was when you bought it.”

Also, historically property has been increasing in value in most urban areas around New Zealand.  You may achieve some capital growth over time.

Cashing it in

So now you’ve paid off your mortgage, how do you get your money back out of that investment?

1. Downgrade

You could downgrade from a more expensive to a cheaper property and free up part of the money to invest for a regular return to live on. For example, if you sold a NZ$900,000 house and bought a smaller one for NZ$600,000, you’d have NZ$300,000 to invest to top up your NZ Super.

Says Hepple: “If you’ve had children and own a larger home which you no longer have a mortgage on when you retire, you probably won’t need a house that size any more.

“You may be able to sell that property down and that should give you the opportunity to realise a tax-free return to help you live on.”

2. Become a landlord

You could sell a large home and buy a smaller home to live in – and potentially one to rent out, if you fancy yourself as a landlord. You could have a regular retirement income to add to your NZ Super.

But, warns Hepple, being a landlord is a lot of work sometimes and not everyone is suited to it.  You are also reliant on the rental market for returns and you’re prone to government intervention.  

3. Get a reverse mortgage

Some people withdraw capital by using a reverse mortgage, however Hepple isn’t in favour of this option.

A reverse mortgage or “home equity release” lets you borrow money against your home, using it as security. The lender gets its money back (plus interest) when your house is sold or you leave the property.

4. You could sell and go renting

It may be possible to sell your home for a big lump sum and then go renting, say, in an area where it’s cheaper to live.

Hepple knows a couple who sold their home for millions of dollars and rented a neighbouring property to live in while living off the proceeds.

The capital they’d freed up will last them a lifetime as a source of investment earnings and they’re still living in their favourite neighbourhood.

It’s good to look at investing in KiwiSaver at the same time

Most of us will have KiwiSaver accounts where our employers and the government contribute to our retirement savings. This is an easy way to invest.

Hepple says: “I’m yet to find an example where it’s not advantageous to be in KiwiSaver while also repaying the mortgage.”

This is harder to do over those expensive years when your kids growing up, than in later life, but compound interest means savings now will reward you handsomely later.

Says Hepple: “The benefits of KiwiSaver mean that with the government tax credits and employer matching your contributions, it could represent one of the best rates of return available.”

First published 17 May, 2018

Story by Brenda Ward

JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. This story reflects the views of the contributor only. Content comes from sources that JUNO considers accurate, but we do not guarantee that the content is accurate. Simon Hepple is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge at www.piefunds.co.nz.