Weigh up all your options
Should you put spare cash into your mortgage or super? asks the experts
Sophie Elsworth
TIPPING extra money into your mortgage versus fattening up your superannuation balance ... What’s the best choice?
It’s a long-running debate that can be extensively argued and often leaves everyone scratching their heads.
Home loan interest rates have never been lower – many are in the 2-3 per cent range – while returns on super funds are in the double-digit category.
Latest statistics from super research house Superratings showed a median balanced fund returned 13.8 per cent in 2019 – a stellar result for those squirrelling money away into their retirement kitty either compulsorily or through voluntary contributions.
However there’s still a large section of society – one in three Australians – burdened with a mortgage and many of these borrowers remain focused on paying off this debt.
Time is of the essence. We are already one month into the new decade and now could be the perfect opportunity for Australians to reassess their financial state of play, to work out whether they are better off shaving down their home loan debt or fattening up their retirement savings.
The financial security of owning your own home can be a blessing, particularly once you enter retirement.
Finishing work without mortgage debt is a desire for most retirees, who don’t want to be shelling out money to put a roof over their head.
Property Planning Australia’s managing director, David Johnston, believes that focusing on home loan debt ahead of retirement is the best option.
“Paying down your home loan ahead of placing extra funds into super makes sense proportionately to the length of your time horizon until retirement,” he said.
Mr Johnston said pouring extra money into your home loan – usually with a variable rate – instead of your super allowed you to have a redraw facility where you could dip into the funds in the case of an emergency.
“This provides you with enhanced risk management should you have cash flow fluctuations,” he said.
When extra funds are thrown into super they must stay there until the account holder reaches preservation age – currently between 55 and 60.
“You cannot access your money once it has been contributed to super,” Mr Johnston said.
Figures from Moneysmart’s online calculator show, on a $300,000 30-year home loan with an interest rate of 3.5 per cent, the monthly repayments are $1347.
If the borrower tips in an additional $200 a month from the beginning of the loan they will cut six years and one month off their loan term,
and save about $42,000 in interest costs.
The Reserve Bank of Australia could cut the cash rate again this month or in the coming months, which is likely to bring down mortgage rates even further.
Tribeca Financial chief executive officer Ryan Watson said: “Where at all possible, it is always a good idea to contribute additional loan repayments to your home loan.
“It will help decrease your non-deductible debt, while at the same time reduce the repayment term on your home.”
Australians have lapped up stellar returns on their retirement savings in the past year, with strong financial markets giving their balances a healthy boost.
Tribeca’s Mr Watson said pumping additional cash into super was “a great way to save on tax”.
“A person earning over $90,000 per annum will save at least 22 per cent tax on the contributions (up to a certain limit) they make into superannuation – this can save people thousands of dollars in tax each year,” he said.
Mr Watson said the benefit of compound interest for additional contributions made into a super account was significant.
“With interest rates so low at the moment, the tax savings associated with focusing on and making additional pre-tax contributions into superannuation makes a lot of sense to me,” he said.
Know your super preservation age. Australians born before July 1, 1960 can access super when they turn 55, but those born after this date must wait up to five years longer, depending on the year they were born. For example, if you were born between July 1, 1962 and June 30, 1963, your current preservation age is 58.
Some people choose to work even if they are accessing their super.
Intrust Super chief executive officer Brendan O’farrell said, in the long run, throwing additional cash into super would be likely to deliver a fatter return.
“In the longer term, it’s also possible that investing money in a super fund’s balanced option could generate a greater return than the interest rate on a home loan,” he said.
“But on the other hand, individuals on lower incomes, with less disposable income, could be more suited to making loan repayments, given this doesn’t lock their money away until retirement.”
Mr O’farrell said once the home was paid off and children had left the family home, Australians could be in a much better financial position to throw any extra money into super.
The Association of Superannuation Funds of Australia’s chief executive officer, Dr Martin Fahy, said in the 10 years to January this year, median balanced super funds had delivered average returns of 7.7 per cent annually.
“That compares with an average mortgage rate of
6.1 per cent over the 10 years or 4.9 per cent if you took a very basic home loan,” he said. “Purely on arithmetic, that last 10 years would suggest that you would be better off at a rational economic level with money into your superannuation,” he said.
“But, looking forward, it’s difficult to know where interest rates and returns are going to go.”
‘A person earning over $90,000 per annum will save at least 22 per cent tax on the contributions (up to a certain limit) they make into superannuation’