Navigating Retirement with Mortgage Debt: Expert Insights from Marco Mellado, Wealth Advisor
Ever asked yourself ‘Can I retire with a mortgage debt’? Retirement should mark the beginning of a relaxing chapter in life. However, for many Australians, the reality of carrying mortgage debt into retirement can cast a shadow over this milestone. Marco Mellado, a seasoned expert in wealth advisory and investments, joined ABC Radio to provide valuable insights on managing home loans from a financial planning perspective. As an expert in superannuation and wealth management, Marco shared practical strategies on how to navigate mortgage debt, offset accounts, superannuation withdrawals, and more. Below, we delve into the interview with Marco Mellado and explore some of the key points that he raised to help people better manage their finances in the lead-up to and during retirement.
The Three Key Stages of Managing a Home Loan
According to Marco Mellado, understanding the dynamics of a home loan requires careful planning that spans three important phases: before taking out the loan, managing the loan once it’s in place, and approaching retirement with debt. Here’s a breakdown of these stages:
Before committing to a large mortgage, Mellado advises borrowers to model their loan repayments and understand what different loan sizes will mean for their finances.
- Model Scenarios with Calculators: Most banks and financial institutions offer calculators to help potential borrowers explore what their monthly repayments might look like for loans of varying sizes.
- Avoid Long Loan Terms: Mellado stresses the importance of paying off debt faster. “If you take a 30-year loan at the age of 35, you’re still going to have debt in your 60s unless you accelerate your repayments,” he warns. Ideally, borrowers should aim to pay off a mortgage within 12 to 15 years to allow enough time for retirement savings to grow.
- Borrow Within Your Means: Marco cautions against relying solely on a bank’s loan approval. “Banks are happy to give you a bigger loan, but their job isn’t to manage your finances—you are.” By using repayment simulations, borrowers can gauge the amount they can comfortably afford while still maintaining a good quality of life.
2. Managing the Loan Once It’s in Place
Once a loan is in place, Mellado suggests smart repayment strategies to reduce debt faster and save on interest. Some of his key recommendations include:
- Switch to Weekly Repayments: “Since interest is calculated daily, paying weekly instead of monthly lowers the loan balance more frequently, reducing the amount of interest charged,” Mellado explains. Simply divide your monthly repayment by four and pay this amount each week.
- Make Extra Payments: If borrowers receive bonuses, tax refunds, or other lump sums, they should consider using that money to reduce the loan balance. “It’s tempting to spend it elsewhere, but putting it towards your home loan makes a big difference in the long run.”
- Be Cautious with Equity Withdrawals: Mellado warns borrowers about the risks of refinancing to access home equity for personal expenses. “Every time you tap into your equity, you increase your loan balance and extend the repayment period.” He encourages borrowers to be particularly careful about using equity for non-investment purposes, as it may compromise long-term financial security.
Leveraging Offset Accounts and Redraw Facilities
Mellado is a strong advocate for offset accounts, which help reduce the amount of interest charged on a home loan.
- How Offset Accounts Work: An offset account is a savings account linked to a home loan. The balance in the offset account reduces the amount of the loan on which interest is calculated. For example, if you have a $500,000 loan and $50,000 in your offset account, you’ll only pay interest on $450,000.
- Repayment Impact: “Even though your monthly repayments remain the same, having an offset account means more of each repayment goes toward the principal, helping you pay off the loan faster,” says Mellado.
- Discipline is Key: Whether using an offset or a redraw facility, Mellado emphasizes the need to be disciplined. “It’s easy to draw money from these accounts for non-essential expenses, but keeping funds in the account will yield the best results.”
Why Interest-Only Loans Should Be Avoided
Many borrowers are attracted to the idea of interest-only loans because they result in lower repayments in the short term. However, Mellado warns that this is a risky strategy.
- No Progress on the Principal: “With interest-only loans, you’re not paying down the principal, so the loan balance doesn’t decrease,” Mellado explains. Once the interest-only period ends, borrowers may face significantly higher repayments.
- Increased Financial Pressure: Interest-only loans can create a false sense of affordability. When principal repayments eventually kick in, borrowers may struggle to meet the higher payments, especially as they near retirement.
Retirement with a Mortgage: Planning for a Debt-Free Future
One of Mellado’s strongest recommendations is to aim for a debt-free retirement. “Carrying mortgage debt into retirement puts unnecessary pressure on your cash flow,” he explains. Without employment income, retirees need to rely on their savings and superannuation to manage expenses, and debt repayments can significantly reduce their disposable income.
Using Superannuation to Pay Off a Home Loan
Mellado acknowledges that some retirees may choose to withdraw funds from their superannuation to eliminate mortgage debt. “This can be a good strategy if the loan balance is small and retirement is near,” he says. However, he cautions that using too much super to pay off debt can leave retirees with insufficient funds to support themselves in the long term.
Downsizing as a Strategy for Debt Reduction
For retirees struggling with debt, Mellado recommends considering a downsizing strategy.
- Selling and Moving to a Smaller Property: By moving to a smaller, less expensive home, retirees can use the proceeds from the sale to pay off their mortgage. “It may not be the dream home, but being debt-free is a solid foundation for retirement,” Mellado explains.
- Superannuation Contributions from Downsizing: Retirees can also take advantage of the downsizer contribution scheme, which allows individuals over 65 to contribute up to $300,000 from the sale of their home into their superannuation.
Tax Considerations for Superannuation Withdrawals
Mellado also touched on tax implications related to superannuation withdrawals. For individuals aged 60 or over, withdrawals are generally tax-free and do not count as taxable income. However, for those under 60, certain restrictions and taxes may apply, depending on their circumstances.
Mellado highlighted the importance of timing withdrawals strategically. For example, withdrawing funds when facing terminal illness can allow individuals to avoid taxes on super balances, though this requires careful planning with a financial advisor.
The Importance of Early Financial Planning
Throughout the interview, Mellado stressed the importance of starting financial planning early. “The earlier you start planning for retirement and managing debt, the easier it becomes to achieve financial security,” he says. He advises people to consult a financial advisor to develop a personalised strategy that aligns with their goals and circumstances.
Conclusion: Expert Advice from Significant Smiles
Marco Mellado’s expertise in wealth advisory and superannuation offers valuable insights for individuals navigating the challenges of mortgage debt and financial planning. Whether you’re managing a home loan, considering early super withdrawals, or preparing for retirement, Mellado’s advice is clear: plan early, manage debt wisely, and aim for a debt-free retirement.
At Sanlam, we are committed to supporting your financial well-being. With our team of skilled professionals, we can guide you through complex financial decisions and help you develop a strategy tailored to your specific needs. Don’t leave your financial future to chance—contact us today to speak with one of our wealth advisors and take the first step toward a secure and stress-free retirement.
