If you have spare cash at hand, it makes sense to reduce your mortgage and save on interest. Or, would you rather increase your super to ensure a better retired life?

Most home owners prefer to apply extra cash towards reducing their mortgage, which could save them thousands of dollars over the life of the loan, apart from reducing the loan term.

pay mortgage vs super

A significant advantage of paying your home loan quickly is the growing equity in your home that can be dipped into – to buy another rental property or renovate your house to further increase the equity. Especially with the current low rates on offer, paying off your mortgage is an intelligent option for most – helping you save interest as well as build up equity in an appreciable asset.

However, it might not be the best option for everyone. In certain cases, particularly if you have a fixed-rate mortgage, extra repayments might not be allowed or attract a certain fee. Contributing to your super not only ensures a comfortable nest egg for your retirement but also offers significant tax benefits, more so if you salary sacrifice, that is, reduce your take-home salary by redirecting a part of it into your super.

In general, if you are a high-income earner, you stand to gain significantly from tax savings by boosting your super. Especially if you earn more than $37,000, the tax benefits of contributing to super can make a lot of difference to your savings. Before-tax super contributions are taxed at 15%, which is much lower than the marginal tax rate of 32.5% if your income is more than $37,000

Take Joanne’s case for example:

Joanne, a marketing professional, earns $90,000 as her annual income. Her marginal tax rate is 32.5% + Medicare Levy.
Joanne decides to pay $100 as extra repayment towards her mortgage each month, reducing her mortgage by $1,200 in a year. However, if Joanne decides to salary sacrifice to her super, an amount of $1,200 after-tax is equivalent to almost $1,800 pre-tax. Since concessional contributions are charged at 15%, this would mean a contribution of a little over $1,500 in her super, as compared to a $1,200 reduction in the mortgage.

But wait, before you leap up and make a decision, keep in mind that concessional or before-tax contributions are subject to a cap of $25,000. If you happen to go beyond the cap, you are liable to pay extra tax.

To ensure you don’t cross the cap, check the amount contributed by your employer into your super before you pump your cash into your superannuation fund.

Did you know that the earnings made in your super account are also taxed at 15% per annum while capital gains in the fund are taxed at 10% if the asset is held for 12 months or more? Many people are choosing to buy investment properties through their super. Read more here.

Mortgage Vs. Super?

It is clear that there are no tax benefits of making extra repayments to reduce your mortgage. However, your current home loan balance and the interest rate can help you gauge the situation better. Moreover, the funds in your super are locked until retirement. However, most mortgages are more flexible, allowing a certain number of free redraws each year.

The benefit of making extra repayments towards your mortgage are immediate – you can see your debt, as well as, interest, reducing. Mathematically speaking, it is hard to compare the returns of your super fund with the interest rate on your home loan. However, the average return of your super fund over the past ten years can be used as a rough indicator of the future performance.

Extra Repayments

In general, most people consider paying off their mortgage quickly to be a prudent financial strategy. You can use this extra repayment calculator to see how a small monthly contribution of $100 towards your home loan, splices the interest and wipes off years from the term.

Rapidly diminishing debt coupled with the accelerating value of your home gives you access to invaluable equity in your home. This means you could refinance to a lower rate (compare home loan deals online) or invest in another property, depending on your investment goals.

“Before you start making additional repayments on your home loan, take stock of your total debts. Do you have any high-interest rate debts, such as credit cards or personal loans that are non-deductible, on your hands? If so, begin by clearing off these high-interest rate debts rather than reducing your mortgage first,” advises Nick, an experienced broker.

To cut a long story short, there is no clear winner, except the one chosen by your individual circumstances and financial goals. Whether you have any emergency funds outside your super, and factors such as age – you are more likely to have paid off most of your mortgage if you are nearing retirement, however, as a youngster, you may need to access the spare cash that could be locked away in your super until retirement – will also affect your investment strategy.

The good news is that it is possible to put your money towards both, boosting your super and reducing your mortgage, or change your strategy in the future. Whichever option you choose, it is essential to maintain financial discipline so that you continue your wealth creation journey into the future.

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By Vidhu Bajaj
HashChing Content Writer


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