What do people do when they are mortgage free? They do remarkably sensible things like save, say financial advisers.
It may not be better than sex, but it comes close. Paying off the mortgage gives rise to immense feelings of satisfaction, relief and elation. While some new home-owners simply roll over and luxuriate in the cash they have freed up, others embark on their next financial conquest.
Australians pay an average $287 a week on housing, or 19 per cent of their gross weekly income, according to the most recent figures from the Australian Bureau of Statistics. In Sydney, the figure is much higher at $398 a week.
That’s a lot of extra cash to play with and the choices are endless. Do you take a trip, buy a new car, renovate the house, beef up your super, buy an investment property or help out adult children? Or do you just relax the purse strings a little and allow yourself some of the small luxuries you have done without to clear the mortgage.
All of the above, according to financial advisers who deal with clients in this happy situation.
Ian Murdoch, of financial advisers Investstone Wealth Management, says paying off the mortgage is a huge relief for most people. “It takes a monkey off your back and opens up choice and flexibility,” he says.
Homeowners who haven’t retired are generally advised to build an investment portfolio and may be encouraged to take on more risk by borrowing to invest in other assets.
While buying investment property is still ingrained in the Aussie psyche, Murdoch says more people are choosing to buy shares because they are more liquid – in other words, they are easier to buy and sell in small or large bundles.
Travel is often top of the list for retirees but Murdoch believes postponing travel until later in life may limit the sort of travel people can do.
“People generally take a breather for three to six months and think about what they want to do,” says Lisa Montgomery, head of marketing and consumer advocacy at mortgage provider Resi.
In her 18 years as a lender for a building society, Montgomery says customers nearly always talked about getting a few things they had gone without to pay off the mortgage quickly. “It might be a second car, whitegoods or a new lounge suite,” she says.
However, Montgomery believes the generous new super rules are changing what people do with their freed-up cash. “I know people in their 60s putting 100 per cent of their wage into super. It’s a new mindset,” she says.
Greg Pride, an adviser with Centric Wealth, agrees and calls super the flavour of the month. This trend is especially pronounced for newly-minted home owners in their 50s who are still working but planning to ease themselves gently out of the workforce.
Alan Freshwater of RetireInvest Bondi is using the new transition to retirement rules for a 55-year-old client who has paid off her mortgage and is thinking of retiring from her well-paid job in the next five years.
With a tidy sum already in super she can draw up to $50,000 a year in a pension while salary sacrificing up to $100,000 into super. (Age-based factors apply but from July 1, a 55-year-old can draw down 4-10 per cent of their super as a pension and salary sacrifice up to $100,000.)
This means Freshwater’s client can work part-time but maintain her standard of living and continue to build her super until she fully retires.
Despite the very real financial strain felt by many in the mortgage belt every time interest rates rise, most of us do emerge from the ordeal with title deeds intact.
The typical home loan is for 25 years, but in reality most of us sell up, move on, refinance or pay the loan out completely much earlier.
ABS figures show 35 per cent of Australian households have a mortgage and 35 per cent own their home outright, down from 42 per cent in the mid 1990s. Rocketing property prices, especially in Sydney and Melbourne, could be partly to blame for the fall but it could also have something to do with changing attitudes towards home loans. The mortgage is increasingly seen as a cash cow to be milked for everything from renovations to holidays, boats and state-of-the-art technology.
Not surprisingly, the older we are the more likely we are to own our own home. In fact, 85 per cent of couples over 65 own their house outright.
Today, baby boomers are most likely to be in a position to pay off their home loan and while some proceed to live up to their reputation as spendthrifts, others find it difficult to change the frugal habits of a lifetime, often learned from parents and grandparents who did it tough during the depression or World War II.
Pride sees many clients who have paid off the mortgage but feel they need to continue to save for the future. “Half the time, the future has already arrived. There’s an argument for being a little kinder to yourself in the present,” he says.
Baby boomers are also likely to have money coming in from inheritances but, despite the real potential to whoop it up, Pride says many continue to fret about the small things, like getting the cheapest deal on a new fence.
Younger people who manage to liberate themselves from the mortgage often have a frugal streak, too. For people such as thirtysomething Russ McEnroe (see case study), paying off the home loan may result in a subtle relaxation of the purse strings, such as buying a shirt you would have once decided was too expensive.
Pride suggests compromising between being kind to yourself now and putting more into super for the future.
Murdoch agrees. “I’m a big believer in getting your lifestyle right first. So you might renovate, have a holiday or help the kids out first,” he says.
PROPERTY WITH A PURPOSE
Russ McEnroe* is a man with a mission: to retire and shuttle between his home in Melbourne’s St Kilda and a place in the Queensland sun where he can play golf four times a week.
While this may sound suspiciously like the pipe dream of many an Aussie bloke, at just 36 years of age McEnroe is on track and single-mindedly pursuing his goal.
Two months ago he paid out his mortgage after 12 years of buying and renovating a series of homes. A year ago he married Kirsten and while they may upgrade to a larger house once they have children they are in no hurry to move.
In the meantime, with two salaries coming in they plan to pep up their investment strategy. “I plan to roll over my super into a more aggressive investment option.
“I want to spend the next few years investing in income-producing assets. It doesn’t make sense to put any more into a non-income producing asset [the family home]. If we borrow, we want to do it for investment properties. It would be great to chip off a property every couple of years,” says McEnroe, who works for a developer and obviously has a nose for property.
“I don’t want a Ferrari or a Porsche, I’ve got no interest in that. But I don’t want to do it tough in retirement. I want to surround myself with comforts that make life interesting. Paying off the mortgage had a big impact for me, but it’s been a slow realisation,” he says. In fact, it’s only in the past few weeks that he’s loosened the wallet, just a little.
“I’m conservative in my spending, not flashy. It might just be going to a restaurant I would otherwise have thought twice about. Or I might buy that shirt. Why not?”
Why not indeed.
*Not his real name
FAST-TRACK TO A FAMILY HOME
In 1994, Rod Dunn and his wife, Sarah, bought a terrace in Petersham, in Sydney’s inner west, right under the flight path. “If the phone rang when a plane was overhead we’d have to say, ‘Just wait 30 seconds,”‘ Dunn says.
The couple borrowed $200,000 but after the purchase they had $12 left in their joint account. “I thought, God, what have I let myself in for,” Dunn says. But with two incomes and no kids they were able to live on one salary and use the other to pay off the mortgage in five years while both were in their 30s.
“We were keen to get out of our mortgage to start a family and we realised it was infinitely easier [to pay off the mortgage] before the kids came along.
“It is about goal setting. I don’t know why I was so determined to do it exactly, but I knew [the terrace] wasn’t the place to raise a family. I think a lot of this discipline was inculcated by my parents,” Dunn says.
After his parents divorced they both had to start again from scratch. “Mum was the best financial planner I’ve seen,” says Dunn, who now works as a financial planner.
“She would put a little aside each week for housekeeping and a little for an annual holiday for my sister and me It was all about short-term emergencies and money for later on. I applied the same principles at Petersham.”
Dunn can’t resist a motivational quote here to illustrate the lessons he learned as a child: The wealthy spend what they don’t save while the rest of us save what we don’t spend.
“We didn’t live like hermits but we didn’t run amok either. We built up our cash reserves and enjoyed inner-city living at the same time.”
The Petersham terrace provided them with a launching pad and just months before the birth of their first child they bought a quieter and more comfortable family home in Haberfield.
The Dunns still have a mortgage but they have a good lifestyle and are happy to call Haberfield home for the foreseeable future. “It’s close to the city and schools and has a lovely feel to it,” Dunn says.
CAN’T STOP SAVING
“It’s a lovely feeling to have the title deeds to your home. It’s a security thing and if all else fails you’ve still got a roof over your head,”Judy Gill says.
But old habits die hard. When Gill and husband Brian paid off their home on Sydney’s North Shore a decade ago they didn’t skip a beat. “We said we’ve lived without $1800 a month so let’s keep saving it,” Gill says.
So they opened a superannuation account in Gill’s name and put the mortgage savings into it.
At the time, the couple’s three children were in private schools and the family had to keep to a strict budget. Now the youngest has almost finished university and the family is living comfortably, but Gill, 59, is still saving.
“My financial adviser says I don’t need to save so hard. I say I’m not saving, I’m just not spending. I still look for value for money.
“We’ll probably continue to save until my husband retires; it never occurred to me to do anything but save. I didn’t say, ‘Whoopee, we’ve paid off the mortgage.’ I still kept to a budget.
“There are basic needs in life like food, shelter and clothing. But after they are fulfilled you only get a marginal increase in happiness from a bigger house or a better car.
“We have enough money to travel, we go to the theatre and have a good lifestyle. We could go to restaurants once a week but we prefer not to.
“We grew up in the 1950s when most people had to be careful with money. My mother was still saving for her old age when she was 85. I wonder if the next generation has any conception of the privations imposed on our parents by the Depression or World War II.
“We have a comfortable lifestyle coming into retirement but we’re not about to blow our money. I’m off to uni, that’s what I want to do. I think my husband would like to study when he retires too.”
Source: Sydney Morning Herald
