Safe havens
With financial markets remaining in a state of turmoil, where’s a good place to park your surplus cash and ongoing savings?
Start with the mortgage
For people with a home loan the answer is pretty straight forward. Paying off the mortgage is a clear winner. You could put the money into a high-yielding account, but because all of the interest earned is subject to tax this simply doesn’t produce the same benefit.
The following table shows the investment return required at different marginal tax rates to make investing surplus savings a better proposition than paying off the mortgage. It assumes a mortgage interest rate of 9% pa, and that investment income is fully taxable.
| Marginal tax rate (excluding Medicare levy) | 15% | 30% | 40% | 45% |
| Rate of investment return required | 10.6% | 12.9% | 15.0% | 16.4% |
Remember, paying off the mortgage effectively provides a guaranteed rate of return equivalent to the loan interest rate. In contrast, significant risk is attached to any investment that might be capable of producing the returns shown in the above table.
Paying down a mortgage needn’t mean losing access to those savings. Most mortgages allow for a re-draw if this is necessary. Many banks also offer mortgage offset accounts. You only pay interest on the difference between the outstanding loan balance and the balance of the offset account, so the end result is the same as reducing your loan.
A super idea
If you don’t have a mortgage but are still working, then investigate the benefits of using accumulated savings and surplus cash flow to support a superannuation salary sacrifice program. Provided your marginal tax rate is 30% or higher, salary sacrifice will give your superannuation quite a boost. If you want to play it safe and sound, you’ll need to make sure that your superannuation fund is directing these contributions to low-risk investments such as cash or fixed interest.
Interesting times
If neither of these options are appropriate for you, attractive interest rates are available from high-interest savings accounts and term deposits. Mortgage trusts may also be worth a look, but be wary of any that are offering higher interest rates than their peers – they’ll be taking on higher risk to achieve those returns.
Conservative, income-seeking investors might even be tempted to look at the dividend yields available from some blue chip shares at the moment. After taking account of franking credits, and assuming the companies maintain their recent dividend levels, income returns in excess of 10% are available from some of our major companies. As noted above, such returns don’t come without risk, so be prepared to take a long-term view.
Seek advice
These are general suggestions only. Everyone’s situation is unique, so please consult us before deciding on where to park your surplus savings.