Spare cash? Super or mortgage?
Spare Cash? Super or Mortgage?
You work hard for your money and you want it to work hard for you. If you’ve got your credit card debts under control and built yourself a bit of an emergency fund, what’s next? Is it a better deal to pay off the mortgage or put more in super?
The case for the mortgage…
Paying off your mortgage has the benefits of increasing the security of your current financial position. It will often give you flexibility if you need to redraw the funds later. Reducing your debt may also make you a more attractive prospect for a bank to lend to if you’re thinking of borrowing to invest down the track. Sure you’re not paying high interest rates at the moment but that means your repayments are making big dents in your capital.
The case for the super…
Super is the government’s preferred method for you to save for your retirement, the money gets locked away, but you can get some pretty good tax breaks in return. Salary sacrificing into super usually gets taxed at a flat 15% rather than your marginal tax rate and the earnings get this concessional tax rate too. In fact the deal is so good that the government restricts how much money you can put into super each year (called your contribution cap). The other benefit of super is that you can choose how you invest that money. If you have a long time-frame for investment and can tolerate the ups and downs of shares, you can benefit from a higher rate of return over the long run.
Questions to ask yourself
1. Am I going to want to use the funds before I retire?
While making additional super contributions could help you retire with more super, it’s important to know that there are strict conditions to meet before you can get the funds, and for most people that is retirement. A key benefit of making extra home loan repayments is that the money can usually be accessed at any time through a redraw facility or offset account.
2. How secure is my personal and financial situation?
This is the same as the first dot point, but worth thinking about again in another way. Even if you don’t plan to use the funds, is there a reasonable probability that you might have to? Relationship breakdown, illness or an unexpected redundancy can have a very disruptive impact on your finances. You want to make sure that you have enough flexibility in your finances to cover unforeseen events. If you haven’t yet built up a buffer, extra repayments on the mortgage might be a better place to begin.
3. How much investment risk is right for me?
Making additional mortgage repayments is considered a low risk financial strategy and provides savings through lower interest costs. For those that are very conservative, this low-risk strategy can provide peace of mind. But if you’re prepared to take a moderate degree of investment risk and your super is invested in shares and other higher growth investments, making additional concessional contributions provide you with higher returns (and thus a better outcome) over the long-term.
4. Does my super or mortgage have a catch?
It’s a good idea to check-out whether there are early repayment penalties on your home loan and whether your super fund has high fees. It may not change your decision about whether to go for super or mortgage but it might prompt you to look at switching lenders or super funds to make the best of your situation.
5. Will I get close to maximising my super caps?
If you are thinking about contributing large amounts of surplus cash to super and/or you are a high income earner it’s worth getting your head around the contribution caps. Your salary sacrifice plus your employer’s contributions (and any other concessional contribution) can’t exceed $25,000 per annum in total (as at 2018/19). If you’re a higher income earner, or a particularly good saver you want to make sure that you don’t exceed these amounts (the tax consequences can be pretty nasty). If your prospects for saving large amounts are likely to get even better in the future (eg a big promotion or an inheritance) it can be worth taking full advantage of your contribution caps as early as possible so that you get as much into the super system as possible. Different caps apply to different types of contributions (and may be impacted if you have a particularly large balance), the ATO website has details on the different types of contribution caps.
6. What kind of spender am I?
Finally it’s also worth doing a bit of reality check on yourself. Some of us manage our money best when we feel like we are getting ahead and making big in roads in our debt. By contrast some us find a redraw facility in the home loan too tempting and find that any extra on the home loan impulsively spent six months later on an impromptu ski weekend, undoing all our good work. The decisions you make about how best to invest your money should always be checked against whether it works with the practicality of your life and the way you manage money best.
You can enjoy the best of both worlds
Don’t forget, it doesn’t have to be one or the other. By splitting your surplus cash between extra super and extra home loan repayments you can give yourself the benefits of both worlds, enjoying the tax breaks and increased returns in your super and the flexibility and security of reducing your debts.
Getting the right advice
A financial adviser can help you weigh up the pros and cons of contributing to superannuation vs paying down your mortgage. They can also help you decide:
- whether your superannuation fund is a good match for your needs, including whether it offers you good value for money and has the features and services that are right for you
- whether the investment option within your superannuation balances the need for security and growth
- what type and level of contributions to superannuation will suit you best
- whether you are utilising your home loan in the most optimal way
- provide you with a referral to a trusted mortgage broker in the event that changes need to be made
- help you work through your financial behaviours to make sure that a strategy that looks good on paper actually fits the practicalities of your life and how you best manage your money.
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