Why paying off your mortgage is better than negative gearing

Pay Off Mortgage If You Can

That long-established desire to have a negatively geared asset to create a tax deduction to reduce taxable income is not always the best option. It assumes the Australian Taxation Office (ATO) is generously doling out tax deductions willy-nilly. It isn’t. You’re only getting a deduction because you are losing money.

For example, assume you have lost $100 on a negatively geared asset and thus reduce your taxable income by $100. If you are in the 32.5 per cent tax bracket, plus Medicare, earning between $45,001 and $120,000, you have saved $34.50 in tax, but you have still lost $65.50!

The only reasons to maintain a debt are (a) if you don’t have enough equity to pay for your asset, or (b) you have the capital but can earn more elsewhere – more than the interest you are paying on the loan.

So, unless you can invest your cash better elsewhere, pay off what, I assume, is a “limited recourse borrowing arrangement” (that allows super funds to borrow) and save on the interest you would otherwise pay, which is usually higher than a standard mortgage.

You also need to put a lot more into your super fund as it is presently heavily weighted to property, an illiquid asset that likely produces a low income. If it remains that way, then you won’t have enough income to pay your pensions when you retire.

I always argue that debt represents a higher risk and also a drain on your retirement savings. Paying off your mortgage removes those risks. Further, in two years’ time, any mortgage interest will likely be significantly higher. Meanwhile, the major stock exchange indices appear to be heading south.

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.

Article Credited to George Cochrane, Sydney Morning Herald

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The information in this newsletter / factsheet is factual but general in nature. It should not and is not to be construed as advice at any level whatsoever. Because it contains general information that has not been tailored to your personal circumstances it may not be suitable information for you. You must always seek personal financial or taxation advice prior to acting on this information. Further, as many of the comments in this newsletter / factsheet are general in nature, anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.


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