Super vs mortgage
Boost your super or reduce debt?
Using spare cash to boost your super or reduce your mortgage are
both good options, but which one is best for you? Here we look at
the pros and cons of each to help you decide.
Assess your financial
If you have some spare cash you'll want to make the most of it.
The first step is to arm yourself with the facts about your
Income and marginal tax rate
Your taxable income determines your top marginal tax rate.
This will help you compare the tax on your income (which will vary
depending on how much you earn) to the tax on your employer's super
contributions (which is charged at a flat rate of 15%).
If you have a partner, the person with the highest income will
most likely save the most by making additional super
Your employer super contributions
There is a minimum amount of super that your employer must
contribute to your super fund each year, known as the superannuation
guarantee contribution (SGC). Some employers contribute
more than the minimum. You will need to know how much your employer
is contributing so that you don't go over the contribution caps.
Take note of the investment option that your super fund has
invested your money in and the average returns over the last 5-10
years. While past returns are not a guarantee of future performance
they can give you a good indication of where your super is
Your current mortgage details
Make sure you can answer the following questions about your
- What is the current balance?
- What is the current interest rate?
- Is the interest rate fixed or variable?
- Can I make extra repayments?
- Are there any costs for making extra repayments?
- Does my loan have a redraw facility?
- If the loan has a fixed or introductory interest rate, when
will the rate change?
Add to your super
Additional super contributions can be made before tax
(concessional) as a salary
sacrifice through your pay, or after tax (non-concessional)
from your take home pay.
Benefits of salary sacrifice
Making extra super contributions through salary sacrifice can
reduce your tax, if your marginal tax rate is higher than 15%.
For example if you earn $80,000 a year your marginal tax rate is
32.5% + Medicare levy.
If you decide you could spare $1,200 a year ($100 a month) from
your after tax income, this would equate to $1,832 before tax. If
you salary sacrificed $1,832 into super, paying only 15% tax,
$1,557 would go into your super fund.
That means the $1,200 reduction in take home pay could either be
a $1,200 reduction of your mortgage, or a $1,557 boost to your
super. If your marginal tax rate was higher, the boost to your
super could be even higher.
Remember, the concessional tax rate only applies to
contributions up to your contribution cap.
Calculating a pre-tax income equivalent
If you know how much you can afford to contribute after tax and
want to know how much the equivalent amount would be before tax,
use the following formula:
After tax amount / (1 - your marginal tax rate including
Medicare levy) = Before tax amount
Example: $1,200 / (1 - 0.345) = $1,832
Making after tax contributions
Making additional contributions to super from after tax income
does not have the tax benefits that come from salary sacrifice.
That means that a $100 after tax contribution to super will
increase your balance by $100, just like a $100 payment to your
mortgage will reduce the balance by $100 (not including any fees
that may apply).
If you are trying to decide which option is better for you,
start by comparing the 7 or 10 year long-term average after-tax
return on your super to your current mortgage interest rate. This
will give you an indication of where you might get the greatest
benefit if no other considerations apply.
Drawbacks of making extra super contributions
Extra super contributions will not always benefit you. Here are
- Contribution caps - There are limits on how
much you can contribute to super each year. If you go over these
limits, excess contributions will be added to your taxable income
and taxed at your marginal tax rate. You will also pay an excess
concessional contributions (ECC) charge on the additional income
tax. See the ATO's page on excess super contributions for more
- Fluctuating returns - Super fund returns are
likely to fluctuate far more than your mortgage interest rate.
- Locked away - Any money you contribute to
super cannot be accessed until you have met a condition of release,
which is usually when you retire from the workforce.
Reduce your mortgage
Using spare cash to make additional mortgage repayments can not
only save you thousands of dollars in interest but can help you
repay your loan sooner. Use our mortgage calculator to see how much
time and money you could save.
Benefits of extra mortgage repayments
The benefits of making additional mortgage repayments
- Reducing your interest expense
- Repaying your loan sooner, which can free up funds for other
- The ability to redraw extra repayments if you need cash in the
future (if your loan has a redraw facility)
- Greater financial security
Drawbacks of extra mortgage repayments
Making extra mortgage repayments does not give you the upfront
tax benefit of making salary sacrifice contributions into super. It
also does not 'lock away' the cash, which means that you may be
tempted to spend it.
Repaying the mortgage on an investment property may have tax
implications so talk to your tax adviser before you do this.
Other financial issues to
Not every decision is black and white and you may have other
factors to take into account, such as:
- Making sure your mortgage is paid off before you retire
- Being able to access funds before you retire
- The longer you have until retirement the more likely you are to
want to access the funds at some stage before you retire
- Whether you have savings outside super, including an emergency
fund, to call on if an unexpected expense arises
- Whether any other high-interest debt has been repaid
It doesn't have to be one or the other, you could put your money
into super and your mortgage. Whatever you decide to do, remember
you can always change your strategy for future spare cash at any
time, if your priorities or your circumstances
Deciding whether to direct spare cash to super
or a mortgage can be difficult, but if you arm yourself with the
facts and assess your situation, you will be able to decide what is
best for you.
Last updated: 21 Aug 2015