What’s better? Tipping money into super or paying off the mortgage
THERE’S no right or wrong answer.
Salary sacrificing money into superannuation has the benefit of a juicy tax concession; before- tax money you tip in is taxed at 15 per cent ( as opposed to your marginal tax rate – say 34.5 per cent, including Medicare levy). So already you’re ahead.
As an example, $ 100 of before- tax money gives you $ 85 in super.
But if you take the $ 100 you’d only have $ 65.50 to spend, after tax.
An extra $ 85 a week into your super fund for 30 years, at an earning rate of 6 per cent, could give you an extra $ 370,000 at retirement.
Buying a home is challenging and chances are you’ll be mortgaged up to the hilt. Any extra money that you can tip into your home loan, especially while interest rates are low, can save you a huge amount of interest over the life of your loan.
So from the example above, let’s assume you have an extra $ 65 a week. Currently on the canstar. com. au database, the average variable mortgage is 4.6 per cent. On a $ 300,000 home loan over 30 years, an extra $ 65 a week can pay your loan off eight years sooner and save around $ 79,000 in interest.
It will also free up eight years of repayments ( around $ 174,000) to invest, which you could then salary sacrifice and use to supercharge your super.
All up, the result would likely be similar.
The case for super:
The case for your home loan:
BETTER questions. Who would you rather be with? Ladies, Brad Pitt or Matthew McConaughey? Lads, Jennifer Love Hewitt or Heather Locklear?
Perhaps you answered a screaming “BOTH!” If you’re a Gen Xer and answered one or less . . . then we simply ain’t on the same page when it comes to what’s hot. Seriously concerned for you.
And that’s the thing about this mortgage versus super question. Both options are sexy. Dead sexy.
Paying wads extra into your mortgage is awesome – own it outright sooner. Reducing tax by contributing to super, while building yourself an awesome retirement? Hard to beat.
A tough balancing act for Gen Xers. It’s literally like scales. So, here’s a rough plan.
Previous generations – those buggers to the right – were able to get into their 50s and shovel money into super. Literally, at $ 100,000- plus a year.
Xers can’t do that. We’re restricted to $ 30k. So, the answer is we need to do a bit of both.
Pay a little extra off the mortgage. Every. Single. Month. But we also need to start putting something extra into super. Now.
Xers, from your late 30s, roughly, do both. Get ahead on your mortgage by all means. But start putting in a little extra to super as well.
Super is the ugly cousin , I know. But even if you only put in an extra $ 3000 or $ 5000 a year now, you will thank me for it in years to come. I’D advise anyone to see an expert adviser on this question. But here are the basic considerations.
First, there’s age ( or life stage). If you’re at the beginning of your working life, you’d want to get ahead on your mortgage. This gives you increased equity wealth in a hard asset. People with young kids usually put windfalls into the mortgage. If you’re in your late 50s or 60s, you’d probably be contributing as much as possible into super because it represents a tax concession to contribute ( 15 per cent compared to your top marginal rate as income).
There are also questions of timing. If you’re closer to retirement, you may pay off remnants of a mortgage with your super – in which case, you contribute the cash to super. But if you want to be debt- free at retirement, you pay down the home loan. Or if you’re building wealth, cash into the mortgage boosts equity and therefore leverage into other property.
Tax differences are interesting: if you put cash into super from a salary sacrifice, it is taxed at 15 per cent and the earnings are taxed at 15 per cent; but earnings into the mortgage have already been taxed as income, while gains on your primary residence will be tax- free.
Another perspective: if you’re selfemployed you can contribute up to $ 30,000 a year to your super and claim it as a tax deduction. You can’t do that with a mortgage!
In the end super versus mortgage depend on your circumstances and goals.