Ben Harvey: Do we stay the course or drop our minimum monthly payments so we have more walking around money

Michele Bullock is nervous. Our Reserve Bank governor is worried about Australia’s long-term economic outlook, going so far as to raise the spectre of global recession. In cutting rates by 0.25 percentage points last week the Reserve’s board warned “geopolitical uncertainties remain pronounced”, which is code for “Donald still be cray”. How did we all react to news of tomorrow’s impending financial doom? We celebrated because we get to save a few bucks on our mortgage today. We got so excited about the prospect of a contracting economy, mass lay-offs and rising debt that we drove the Australian stock market to a fresh three-month high within 24 hours of Michelle’s gloomy update. Is it just me or is it weird that we all start relaxing just when reserve banks start panicking? Tuesday’s cut means someone with a $500,000 mortgage will save $960 a year. Most of the banks passed on the rate in full (and somehow expected a pat on the back for not screwing us) which means indebted punters like me face a decision. Do we stay the course or drop our minimum monthly payments so we have some more walking around money (and by walking around I mean walking into Dan Murphy’s, where for $960 you can buy 274 bottles of Bowler’s Run shiraz*). I did some maths so I could make an informed decision about the opportunity cost of buying a year’s worth of hangovers. Assuming the circuitry in my calculator is working correctly, that cost is considerable. Many of us will now be paying about 5.5 per cent instead of 5.75 per cent on our loans as a result of last week’s announcement. If, instead of getting boozed, we maintain our current payment schedule (that means paying close to an extra grand off our mortgage a year) then over the course of a 25-year loan we’d save $25,600 in interest and be debt-free 15 months earlier. It’s called deferred gratification (resisting the temptation of an immediate reward in favour of a more valuable prize later on) and it’s what grown-ups are meant to do. It’s also boring so I searched for another option. What about using the extra money to pump the superannuation account? Let’s say you’re 40 years old, an age I picked for no better reason than because I recently read that the average super balances for men and women of that vintage are, respectively, just shy of $140,000 and a bit over $107,000. If you are in a high-growth option the annualised returns of around 10 per cent will mean that after 25 years of super guarantee payments by your employer your nest egg will be $1.5 million for men and $1.15 million for women. If you put that $960 a year Michelle just gave you into your super for the same period the extra $24,000 in contributions will translate to a whopping $100,000 bonus when you retire. Let’s assume that you are a real grown-up and resisted the urge to reduce your payments not just after this latest cut but also the one last month. That would put a person owning $500,000 $1920 a year ahead. Plonk that extra cash on your mortgage (instead of on plonk) and you will save a shave over $48,000 in interest. Putting it in super? That’s an extra $188,000 when you retire, which is enough for 50,948 bottles of crap wine, for those still interested in the liquor store comparison. At face value it looks like the money should probably go into super but for what it’s worth I reckon use the cash to pay down your mortgage. The most effective financial advice you will ever get is also the simplest and most boring: pay off your home as fast as you can. In this country if you own your own house when you retire then you will be just fine during your golden years. You might even be able to afford the occasional bottle of vino that actually has a label on it. *My Googling revealed that the same outlay would get you 265 bottles of water from Japan. The fact we live in a world where a 300ml bottle of water costs more than a 750ml bottle of claret will be the topic of a column on another day.