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 situation

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 situation.

Video: Effie Zahos on putting money into your mortgage or superannuation

Effie Zahos on putting money into your mortgage or superannuation video

In this video, Effie discusses the options of putting extra cash into your mortgage or superannuation.

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 contributions.

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.

Super returns 

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 heading.

Your current mortgage details

Make sure you can answer the following questions about your mortgage:

  • 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 the drawbacks:

  • 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 information.
  • 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.

See how much time and money you could save.

Mortgage calculator

Benefits of extra mortgage repayments

The benefits of making additional mortgage repayments include:

  • Reducing your interest expense
  • Repaying your loan sooner, which can free up funds for other investments
  • 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 consider

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.

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Last updated: 04 Feb 2019