Should I repay my home loan or boost my super?

Adding money to superannuation has its advantages and so does making extra repayments on your home loan. So, if you’ve got some extra cash, how do you choose where to channel it, or should you do both? We help you weigh up the options.

On the one hand, contributing more to your super will increase your balance at retirement.  On the other, making extra mortgage repayments can help you clear your debt sooner, reduce interest payable, increase your equity position and put you on the path to financial freedom.

The correct answer depends upon your circumstances, tax rates, age, debts, contribution caps and your desire for financial security or freeing up funds for other investments.

 

Which will give you the best return?

The comparison between super returns vs. interest savings (on your mortgage) is difficult to do!  The average return of your super fund over the past 5-10 years may give you an idea of what your final payout figure may look like when you retire.  Technically, you can then compare this to your current mortgage interest rate to get an idea of which option is better for you.

Be careful though: past super fund performance is not a reliable indication of future performance!

In addition to this, most people won’t be paying the same interest rate over a 5-10 year period.  You may refinance or switch lenders during that time.  The benefit of making extra repayments is that you’ll see the benefits much sooner.  Because you’re paying more than the minimum mortgage repayment, you end up paying less in interest and more off your principal loan amount (the interest-free component).  Paying just an extra $25 a week into a 25-year $300,000 mortgage (at 5.5% interest) saves $32,000 and shortens the mortgage term by 3 years.

current mortgage

Use an extra repayment calculator to see how much you could save!

A fully paid off roof over your head gives financial security and comfort – no one can take it.  Additionally, the quicker you get out of debt, the quicker you get beyond the reach of lenders that hoard rate cuts or hike interest rates at will.  It is also the surest way to protect yourself and your family if things go wrong.  If you do not have to find a big monthly repayment, you only need to cover bills and expenses to survive.

By making extra mortgage repayments, coupled with the increase in the value of your property, you’ll build equity in your property faster.  By doing that, you can refinance your home loan to a cheaper rate much sooner and even release some of the equity you built up, freeing you up to invest elsewhere.

If your goal is to pay off your mortgage quickly so you can buy an investment property, make sure to speak to a financial planner.  Investing in the property market is by no means a sure way to financial freedom and securing your retirement nest egg. Then again, neither is investing more than the minimum in super.

You should speak to a financial adviser if you’re considering either investing in property, paying off your mortgage faster or making extra super contributions.

 

Case study… meet George

George recently received a pay rise at work, and as a result has an extra $10,000 a year.  He wants to know if he should plow it into his mortgage, or use it to top up his super.

George is a high-income earner, so his income is taxed at 39%.  He is paying 4% interest on his mortgage, and wants to retire in 10 years.

As you can see from the purple bar graph below, George can put his extra money into his super pre-tax, through salary sacrificing.  This means that instead of being taxed 39% on that money, he pays only 15% (the super contribution tax).

meet george

If George puts his $10,000 per year into his mortgage, he must do this post-tax (after paying 39% income tax).

Over 10 years, George could either:

  • Save $122,708 in interest on his mortgage; OR
  • Increase his super by $184,822.

On the numbers alone, the best option for George is putting his extra money into superannuation.

meet george2

 

So… what’s the conclusion?  Super or mortgage?

Whether you decide to put more into your super or mortgage, you need to pay off your home loan before you retire.  At the same time, you must consider whether you’ll need to access any additional funds you put aside before you reach retirement.

HOME MORTGAGE

Pros

Cons

  • Any capital gain is tax-free
  • Peace of mind knowing you own your own home
  • Easy access to your money (offset account)
  • Paying less interest overall
  • Freeing up your short-term cash flow
  • You have greater equity
  • Heavy exposure to the property market
  • Repayments come from after-tax dollars (vs. super that come from pre-tax dollars)
  • Right now, interest rates are low
SUPERANNUATION

Pros

Cons

  • Earnings taxed at a maximum of 15%
  • This will reduce your tax
  • Compound effect of returns over long periods
  • If you’re a low-income earner, the government may give your super an extra boost through their co-contributions scheme
  • Lower tax environment in retirement
  • You may not discharge your mortgage until retirement
  • Money in super is not accessible until you reach your preservation age
  • Rules around accessing and contributing to super change regularly
  • They can change the rules…

 

If it’s super, it’s locked away. If it’s in your mortgage, there are options to redraw.  Either way, both options are far more valuable than investing in a straight savings account at the bank.

In most cases, there isn’t one set strategy that you should follow and it can quickly change as you grow older, start a family and reach retirement age.  For young people, it may indeed be best to attack your retirement once you are liberated from mortgage repayments.

If you carry higher-interest debts such as credit cards, you should pay those off before you attack anything else, mortgage or super.

Life is complex so it pays to have a financial adviser on your side before you make any big financial decisions when it comes to your superannuation or mortgage.  To book a free consultation with Fortress, please book online or contact us on info@fortressfs.com.au

Written by Emma Linton Doig, Practice Manager at Fortress Financial Solutions.

Fortress Financial Solutions founder Chris Black is an award-winning financial planner based in Toowoomba who specialises in superannuation, investing, business succession, cash flow management, retirement planning and personal insurances (including life insurance, income protection, total permanent disability and trauma insurance).

Information on this site may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice we have given you, having regard to your own objectives, financial situation and needs before acting on it. Where the information relates to a particular financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product.

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