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As a population, we’re split roughly into thirds: mortgage holders, people who own their homes outright, and renters. And while it’s a fair assessment to think of renters as primarily a younger cohort, an increasing chunk of them (30 per cent as of 2020) are between 45 and 65 – an age by which many of us might assume we would be homeowners.
Those renting in their 40s, 50s and beyond need to consider if it’s worth tying up their funds in a mortgage or better to invest elsewhere. Credit: Michael Howard
What’s the problem?
This week, I received a question from a reader in this camp, who is in their 40s and wants to set themselves up best for retirement.
Their question was, should they keep renting (possibly into retirement) and focus on contributing to their super, or instead focus on getting a mortgage later in life? The reader mentioned feeling “behind the eight-ball” given the current property market, and their situation isn’t uncommon.
What you can do about it
The question is a tough one to answer, given the best course of action can vary significantly depending on your personal situation, but here are some things to consider:
- Is your super on track? The first thing to look at, according to RSM Financial Services Australia director Grace Bacon, is whether your current retirement plans are on track. There are many handy online calculators that can estimate how much super you’ll have in retirement, and this can help determine whether taking the plunge into property is a sensible move. “Consider if you will be comfortable servicing a mortgage after you’ve reached retirement age – will you be able to make the payments on a reduced income once you’re out of the workforce?” Bacon says. Tallying up the costs of a potential mortgage and comparing them to how much you’re spending on rent can help you get a clearer picture, but Bacon stresses you shouldn’t stretch yourself too far.
- Think about the returns: We’ve all heard the stories of the house bought for $200,000 and sold for $2 million, but you’d be hard-pressed to see those returns these days. For Dan Miles, managing director at Innova Asset Management, the question is all about your potential returns, and he bets on super as the best place to put your money. “From a pure return point of view, having greater allocations to super should be very beneficial later in life,” he says. “Property typically doesn’t do as well as equity investments over the long term.” However, he notes property has advantages that super doesn’t, including more flexibility, the ability to leverage it to buy other things, and favourable treatments when it comes to calculating things like the age pension.
- Consider your age: As you get into your 50s and 60s, getting a mortgage from one of the big banks can prove tricky. Bacon says you will need to focus on how you’ll be able to service the loan as you get older, especially into retirement, and many banks will likely consider this carefully. For example, if you took out a mortgage at age 50, and you retire at 65, your loan term is effectively 15 years rather than the usual 30-year term, and your repayments will effectively double, she says. “If you can demonstrate you will have other income sources post-retirement (for example, a pension or passive investment income) this also will be considered,” Bacon says.
- Should you “rentvest”? This is a concept that’s been bandied around for a while which involves foregoing a mortgage and using any excess funds to invest in things like shares and other assets. This has the advantage that you can access the funds earlier than your super, but Money guru Noel Whittaker warns the approach may look better on paper than in reality. “Most people who rent don’t actually invest the extra money they’d save by not paying off a mortgage,” he says. “Moreover, with rents currently so high, there isn’t much left over for investing.” This strategy can also pose problems if you sell your assets to buy property further down the line, as you’ll be liable for capital gains tax.
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.