Mortgage vs Super - What should you prioritise?
Are you better putting your extra money into your home loan or your super fund?
Picture this: you have an extra $500 per month and you’re wondering whether you should use the extra cash to pay off your home loan faster or to top up your super fund.
Or maybe you are expecting a large tax refund worth thousands of dollars and you’re thinking whether you’ll get more of your money’s worth by making additional contributions to your mortgage or your super.
As with most financial decisions, there is not a one-size-fits-all approach – no two people are the same, so there’s no straight answer to this question.
We lay out the pros and cons of both options as well as other factors to consider when deciding below.
Choosing to pay extra into your mortgage
- Lower interest rate on your mortgage - By making extra repayments on your home loan, you can potentially lower the interest rate on your mortgage, potentially saving you a significant amount of money. It can also help you pay off your mortgage faster.
- Boost your equity - Investing into your mortgage will boost your property’s equity.
- Financial liberation - While it’s not a financial benefit, many people feel better having paid off their mortgage and that they own their home outright.Paying off your home loan faster can also be beneficial to your long-term financial position. Additionally, home owners also have the opportunity to access the equity in their homes to supplement retirement income and manage longevity risk.
- Lack of tax incentives - Unlike with super, there are no tax perks that come with adding money into your mortgage or paying off your home loan early. If you choose to pay down your mortgage instead of maxing out your tax-advantaged retirement accounts, you will give up those tax savings.
- Lack of liquidity - You can still access your money with a redraw or offset account. However, for most people, their money is tied up in their homes. Though you would still have your home equity to tap into, selling your home and accessing those funds may prove difficult.
Choosing to pay extra into your super
- Bigger super balance in retirement - The biggest advantage of making extra contributions to your super is that you will have more money come your retirement. If you choose to do salary sacrificing each month, even a few hundred dollars would boost your balance significantly.
- Tax advantage - If you choose to put more money into your super, you have the opportunity to contribute either before or after tax. Before-tax contributions help your tax position. Any before-tax money that you put into super is taxed at just 15 per cent. You may also be able to claim a tax deduction if you make an after-tax contribution. Meanwhile, if you choose to pay your mortgage, you’re doing that with after-tax money, taxed at your marginal rate, which is most likely higher than 15 per cent. Before choosing to pay more money in your super contributions, make sure you’re within your contribution cap. Most employers simply pay the minimum superannuation guarantee (SG) contribution, but others contribute more than the minimum through pre-tax salary sacrificing.
- Lack of access to money - The biggest disadvantage of putting extra money into your super is that you will not be able to access your money until you meet a ‘condition of release’. This includes reaching your preservation age and retiring; reaching your preservation age and choosing to begin a transition to retirement income stream while you are still working or are 65 years old (even if you have not retired).
Other factors to consider
So, how do you decide between mortgage and superannuation?
When you are trying to figure out what is the best option for you, here are some of the issues to consider.
- Your age - Paying off your home loan in earlier years can allow you to make additional super contributions later in life. It’s also the most popular route that most Aussies take when deciding whether to top up their super or their mortgage. Your surplus cash flow when mortgage payments are reduced and when your income may have increased will also boost your super contributions.
- Consider the size of your mortgage and how long you have left to pay it off - A dollar put into your mortgage at the start of a 30-year term will have a more significant effect on the amount interest paid than a dollar put in at the end. Generally, people are advised to focus on reducing their mortgage particularly in the first few years. When you first take out a loan, interest represents a larger proportion of your repayment than principal. So, the more you pay off earlier, the less interest you’ll pay over the long term.
- Cash rate - The prevailing interest rate set by the Reserve Bank of Australia (RBA) should be taken into consideration when deciding whether to top up your super or finish paying your home loan. In the current low interest rate environment, the rate on mortgages is at around 3.5 per cent, significantly lower than a few years ago, when rates were near 7 per cent. This means that many home owners, particularly those who bought some time ago on a variable rate, will now be paying much less each month for their home.
- Personal preference - Sometimes, the decision all boils down to your personal comfort zone. For many people, owning a home is a top priority. And paying off your mortgage on your property as fast as possible may seem like a generally sound financial decision. On one hand, while it’s tempting to pay off your mortgage as quickly as possible, your super balance is important if you want to have a comfortable retirement.
The Money Edge | Bundaberg