4 MINUTE READ

One of the most common questions about money is whether it’s better to pay money off the mortgage or put it into super. There’s no perfect answer to this question, but it’s important that if you’re weighing up this sort of decision that you do it knowing what your options are.

One of the most common questions about money is whether it’s better to pay money off the mortgage or put it into super. There’s no perfect answer to this question, but it’s important that if you’re weighing up this sort of decision that you do it knowing what your options are.

There are two things we can say for certain:

• Super gives you the best bang for your buck, BUT
• Paying money off the mortgage gives you a certain return

Let’s explore these ideas…

Super is the best (legal) tax break in town. Money that’s salary sacrificed to super is only taxed at 15% which is a big tax break for anyone earning over $37,000. This is because income above that is taxed at 32% and up to 45%, depending on the level of income. So saving somewhere between 17% and 30% in tax is a huge saving!

While the tax benefits of sending your money to super are incredible, there are some issues. Firstly, once if goes into super you can’t touch it until you reach a condition of release, which for most people will be reaching their preservation age (between 55 and 60 depending on when you were born). When I ask people what the biggest disadvantage of super is, most say that you can’t touch it. They usually have a lightbulb moment when I point out to them that not being able to touch it is the biggest advantage of super – if you can’t touch it, you can’t spend it, and if you can’t spend it, it will be there when you most need it… when you retire and have to start paying yourself from your retirement savings.

The other issue with super is that it gets invested and depending on how you choose to invest it, it’s subject to the ups and downs of investment markets… this is an issue which can be easily managed using sensible investment strategies.

If you’re looking at contributing to super, just be mindful that there are limits to how much you can invest in super each year (in the interests of your time, I won’t go into the details right now). The fact the government puts these limits in place should give you a clear indication of how attractive it is to hold money in super. If that wasn’t the case, the government wouldn’t put any limits on it!

Let’s now look at paying money off the mortgage. This doesn’t have the fantastic tax benefits of using super, but it does offer a guaranteed tax-free return equal to the interest rate you’re paying on your loan.

Interest rates are currently at record lows, meaning that guaranteed return isn’t very high, but it does offer the opportunity to pay bigger chunks off the mortgage than what you can at higher interest rates.

Dollar-for-dollar, you can’t beat super. But getting money paid off the mortgage and owning more of your home provides a certain level of security. So there isn’t a perfect answer to the question. Be mindful of a few things:

• Make sure you’re paying the lowest interest rate you can get, as this will enable you to pay off as much principal as possible with each repayment.
• Make sure you’re paying more than the minimum mortgage repayments.
• Make sure the super you do have invested is working as hard as possible.
• And you don’t have to do all one or the other. You can combine the two strategies and do some of both!

If you’d like to learn more about how to piece the puzzle together, then financial advice can help.

Keep working your way towards financial freedom!

Daniel