Published: 3rd December 2018
If you’re trying to plan for your future should you put your spare cash into your mortgage or use it to top up your super?
There are benefits to both approaches. The answer depends on your personal financial circumstances, life stage, personal tax rates, your age, debts, contribution caps, and whether you’re likely to need the extra money before retirement.
PAY OFF YOUR MORTGAGE FASTER
Peace of mind – Paying off your mortgage faster has a psychological as well as a financial advantage. There’s nothing like knowing you have a guaranteed roof over your head. You’re also no longer at the mercy of sudden interest rate rises.
Save on interest rates – By making extra mortgage repayments, you can save thousands in interest over the lifetime of your home loan. Be sure to check if there are costs for making additional repayments, or fees for paying off your loan early.
Access to funds – If your mortgage comes with a redraw facility, you can still access this money if need be, whereas with super your money is locked away until you reach the ‘preservation age.’ Of course, this is a double-edged sword, as you are more likely to spend it if it’s accessible.
Current low-interest rates – Interest rates are currently at an all-time low, meaning that you have the opportunity to pay off your mortgage much faster.
Home equity – Paying off your home loan faster also gives you equity that you could use for other investments as part of your retirement strategy.
Time on your side. If you are younger, you may want to pay off your home loan debt sooner and focus on savings for your retirement once it’s paid off.
TOP UP YOUR SUPER
Lock the money away – Putting money into super ring fences it for your retirement and prevents the risk it’ll get used for anything else.
Retirement lifestyle security – Experts say that many Australians greatly underestimate how much income they’ll really need in retirement. A good starting point is to figure out how much you’ll need in retirement and whether it will fund the lifestyle you want.
Tax benefits – Contributions from pre-tax income (salary sacrificing) are taxed at 15 percent up to a capped amount. Your taxable income determines your top marginal tax rate. Use this to compare the tax on your income with the 15% tax on your employer’s super contributions. If you are self-employed, you can claim personal super contributions as a tax deduction up to the capped amount.
Contribution caps – Most Australians only receive a 15% tax rate on the first $25,000 they contribute to super. The Superannuation Guarantee Contribution (SGC) mandate your employer makes – currently 9.5% of income – counts towards those caps. However, some employers contribute more than the minimum. Make sure that you know how much your employer is contributing so that you don’t go over the contribution caps.
Super returns – With interest rates currently so low, the returns on your super may well be higher than the interest you’re paying. However, super returns are far more likely to fluctuate than your mortgage repayments. The average rate of returns over the last five to ten years can give you a sense of how money invested in super compares to the interest on your home loan.
Age until retirement – The closer you are to retirement age, the more important it is that you build up your superannuation balance. Estimate how many years you have left in the workforce, your target amount for superannuation or retirement income, and how manageable your current home loan is. Ideally, by age 50 you should have significantly reduced your home loan and be on track to pay it off before you retire. This should free you up to concentrate more on your retirement savings.
Remember that neither choice is bad. No matter whether you pay more off your mortgage or put that cash towards super, both options mean you are setting yourself up for a more secure future and comfortable retirement.
Any advice given is of a general nature only and does not take into consideration your personal circumstances. Please consider the appropriateness of the advice before acting.