Paying extra into your mortgage vs super
Many people ask the question about paying off one’s mortgage vs making super contributions. This is an interesting question especially in such a low interest rate market. Remember, for most people, putting extra cashflow into super (as Concessional Contributions) is taxed at 15% versus your marginal tax rate if taken as salary. The long term benefits of this tax savings can be significant.
Here are some things to consider:
Are there times when it makes sense to focus on one over the other?
If you have just taken out a mortgage, using your cashflow to pay down your mortgage as fast as possible in the earlier years should allow you to make extra super contributions later as cashflow improves (mortgage payments are reduced). Younger people are usually more likely to have increased expenditure over the years and may not want money tied up in super, while older people may be in the better financial position to have the surplus cash to top up super before retirement.
Sometimes it comes down to a personal comfort zone and satisfaction of knowing you own your own property outright. This can then be a building block to help finance other investments.
What should people consider when weighing up between the two options?
With money contributed to super, it may not be accessible, if required, before having the ability to access it (i.e. retirement). If one requires money before retirement, paying off the mortgage may be a better option, especially if there is a redraw facility, offset account or access to equity in the property.
Should I have a certain amount of equity in the home before starting to invest in super?
Once again, this can be an emotional versus financial as well as an age decision. As long as you have a secure income stream and access to emergency funds if required, having at least 30-40% equity in your family home is a good target before starting to look at super contributions.
Conclusion
Taking advantage of superannuation as a tax effective way to save money for retirement is always a good strategy . One could also eventually use a lump sum amount from super to pay off any remaining mortgage to ensure a debt free retirement.
With interest rates and mortgages at record lows, ensuring you have the best deal is paramount. With super being a long term strategy, make sure your investment options are suited to your future planning.
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