27 Sep Should I Pay Down My Australian Mortgage Whilst in Singapore..?
This article originally appeared on – https://singapore.feebasedfinancialadvice.com/should-i-pay-down-my-australian-mortgage-whilst-in-singapore/
This was the question that I was asked recently during a meeting by an Australian expat in Singapore, and one that many Australian expats ask. At first glance, it can seem like a ‘no-brainer’ to use your excess savings to reduce your mortgage while you’re working in Singapore, particularly given the currently weak Australian dollar relative to the Singapore Dollar.
But…like with most matters of personal finance, there is a lot more to consider here.
This week I explore what you should consider when it comes to deciding whether you should pay down your mortgage or invest elsewhere, and some simple scenarios.
- What impact will it have on your Australian tax liability?
This is often the key question for most Australian expats when it comes to deciding whether or not to pay down your Australian mortgage. As a non-resident of Australia, your taxable Australian income (such as rent) is taxed at 32.5% on the first $90,000, and unfortunately, we don’t get the benefit of any tax-free threshold.
By reducing your mortgage balance, you may be shifting your property from being negatively geared to positively geared. As a quick refresher, here is what negative and positive gearing refers to:
Negative gearing relates to a scenario where the costs of owning the rental property, including items such as interest expenses, other borrowing costs, strata fees, maintenance and other fees, outweigh the rental income that the property is generating. Put simply, the income is outweighed by the ongoing expenses of holding the property.
Positive gearing, as the name suggests, refers to a scenario where the income from the property, which is typically in the form of rental income, is greater than the ongoing costs of owning the investment property. To put this scenario simply, the income outweighs the ongoing ownership expenses of the property.
It’s also important to recognise that a negatively geared property could be accruing tax losses for you that you would utilise in future against Australian-sourced income or capital gains, which could create tax savings.
Let’s consider a scenario here.
In this scenario, we’ll assume that Cameron & Fiona own an investment property in Brisbane valued at $3M, with a mortgage balance of $1.8M. Cameron & Fiona have accumulated a cash balance of $1M and they’re considering whether to use this cash to reduce their mortgage balance. The property as it currently stands is negatively geared, and accrues an annual tax loss of $25,000. They have spoken to their Financial Planner and accountant, and determined that if they reduce their mortgage by the $1M, they would generate a taxable income of $25,000 per year, which would incur a tax bill of $8,125.
- What is your mortgage interest rate?
The next key consideration here is to determine what interest rate you’re actually paying on your mortgage, which will then allow you to calculate what return you’ll be able to generate on the cash that you’re using to reduce your mortgage. It’s important here to also consider any lost tax credits by converting your property from negatively geared to positive also if that scenario is going to apply to you.
Let’s assume that your mortgage interest rate is 4% per annum. In simple terms, every extra dollar that you reduce your mortgage by would be earning you 4% per annum in the form of savings on interest. However, it’s important to consider here that you may also incur a tax bill of 32.5% on any positive taxable Australian income, and you may loss the tax losses, which could benefit you at a top marginal tax rate of 47 – 49%. Therefore, your actual rate of return may in fact be closer to 2.5 – 3% depending on your individual circumstances and financial position.
- What is the exchange rate outlook?
The next key consideration here is what is the actual exchange rate, and what is the outlook? The second part of this question is far more difficult to predict with any real accuracy, and I’d suggest it’s very much a fool’s game, so all we can really look at with confidence here is what is the current exchange rate relative to where it’s been historically.
If we consider the SGD/AUD exchange rate for example, as outlined in the chart above, we can see that the Australian Dollar is relatively low against the SGD relative to the last 10 years, with the exception of the Covid-19 spike in early 2020. This may make it attractive to convert funds to Australian Dollars, however doesn’t necessarily imply that you should pay down your mortgage, but perhaps consider investing in Australian Dollar-denominated investments instead.
- Are you going to live in the property in future?
The next critical consideration to explore here is whether you plan to live in the property again in future or not, and whether you, if you do plan on living on it, do you intend for it to be your ‘forever home’. It’s important to explore the structure of your mortgage here and the security that applies to it as this could impact your overall tax position in future.
In simple terms, debt is tax-deductible where the purpose of the debt is used to produce taxable Australian income, such as a mortgage secured by your investment property that is rented out. Debt isn’t tax-deductible where the purpose of the debt is to purchase your primary residence, i.e. the home that you live in.
Now you might be thinking that you’ll pay down the mortgage now, and if when you repatriate to Australia you decide not to live in it, you’ll simply draw down the equity in your property and use that to buy your home. Given that you’re drawing the equity from an investment property, it’ll be tax-deductible, right? Sadly, no. In this case, given that the purpose of the debt would be to purchase your own home, it wouldn’t be taxable deductible.
You can start to see that this can be a very complicated and complex area of advice, so it’s important to seek professional guidance and advice to explore what is going to be right for you.
If you’re considering whether to pay down your mortgage, invest, or what may be the right scenario for you, book in a complimentary discussion with us.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
Australian Expatriate Group is a division of Global Financial Consultants in Singapore providing specialist advice to Australians living abroad.
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.