Making optimum mortgage payments work for you

You have often written that the optimum repayment on a housing loan is $900 per month for every $100,000 of mortgage. Can you explain the reasoning for this? I am trying to figure out if paying my mortgage down quickly is better than buying shares. I was thinking about buying an index fund.

The name of the game is to accumulate as many growth assets as you can, but you need to get the mortgage under control first.

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Because of the way compounding works, once you have got the mortgage down to about 10 years you save little interest by making extra payments.

This is why I recommend a maximum payment of $900 a month for every $100,000 borrowed, which would be around a 10-year term with interest rates at between 4 per cent and 5 per cent.

I agree with your strategy to invest in an index fund. They have returned between 8 per cent per annum and 9 per cent per annum over the long term.

If you wish to model a theoretical scenario, just go to my website and have a play with the two stock market calculators.

They should enable you to invest a notional lump sum, or a regular monthly sum, on any date you choose from January 1980 until now, and work out what you would have if that money was invested in the All Ordinaries accumulation index, which includes income and growth.

I am planning to buy my first home and my parents, who live overseas, want to send me $90,000. I was convinced I did not have to pay tax on gifts until I found the following on the Australian Taxation Office website: "You don't have to declare rewards or small gifts, such as cash birthday presents. However, gifts may be taxable if they are large amounts…" I am concerned, as I consider $90,000 a large amount. Will I have to pay tax on a $90,000 gift?

I wouldn’t be worried. The ATO are most unlikely to regard a gift of $90,000 for a home deposit as a "large amount". That section is targeted at money launderers.

You recently advised a pensioner couple about the relative merits of gifting, versus loaning money to a child. Our position is that my wife and I are both drawing a pension from our super funds, and we have promised our 30-something son that we’ll give him $100,000 to help him jump on the housing ladder. Now seems about the right time to give him the money. We do not draw a government pension and, even after giving the money, we would still not satisfy the asset test for a pension in part or whole. What are the rules about gifting in these circumstances, and what would you advise?

There is no gift duty in Australia – the only adverse consequences of making a gift could be if you are thinking about eligibility for the age pension, which is clearly not an issue here.

I agree it’s better to help your children sooner rather than later, provided they have proven themselves to be good money managers.

However, you need to decide if this is to be a gift or a loan and have documentation prepared by a solicitor, which would be appropriate for the route you decide to take.

If the money is a gift and your son has a relationship or business breakdown, his partner could end up with a share of it.

The simplest method, in my opinion, is to make an interest-free loan. You could always forgive all or part of it in the future, when you deem the circumstances are appropriate.

You were recently asked whether it was possible or not to have both a pension fund and an accumulation fund. In your reply, you said an accumulation fund pays 15 per cent income tax annually. Is this tax payable if the fund is not being drawn upon, or is it payable as money is withdrawn from it? We were also wondering what you meant by advising that money could be withdrawn from the accumulation account and invested in the writer’s name, assuming that the accumulation account is already in his or her names.

A superannuation fund can be in accumulation mode when money is being added to it, in which case the fund will pay income tax at the rate of 15 per cent per annum.

A pension fund is a tax-free fund but you are required to withdraw a certain sum each year, based on your age and the fund balance at the previous June.

Given that the tax-free threshold is $18,200 a year and there are various offsets available to older people, it’s a good strategy, in some cases, to move money from your super to your own personal names, where the earnings would still be tax-free if you kept under the threshold, and where there are no requirements to withdraw a certain sum each year.

It also frees you from the possibility of the "death tax." which applies to the taxable component of a superannuation fund left to a non-dependent.

Noel Whittaker, AM, is the author of Making Money Made Simple and numerous other books on personal finance.

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