Should you forget your super and attack your mortgage while rates are low?
With a limited budget and a mortgage, many Australians wonder whether they should add more money to their super or increase their home loan repayments. With the tax advantages of super, topping up your balance in preparation for retirement seems like a good idea. The problem however, is knowing what is right for your situation – is it really better to add to your super or to pay down your mortgage?
As an example, if you are a regular Australian on a middle income wage who is not going to retire in the next 5 years, but you don’t want to lock all of your money away, then it might be best if you pay down your mortgage. If you do this, you can access these additional payments through an equity loan at any time. This is handy if your financial situation takes a turn for the worse or you have unexpected expenses.
On the other hand, if you don’t need access to this cash before retirement, then topping up your super might be the best option, rather than paying down your mortgage. Let’s take a look at some of the benefits of each option, so you can decide which is best for your situation.
Benefits of topping up your superannuation
You can use your pre-tax dollars and make on-going additional payments to your super via salary sacrificing. This is a great way to increase your superannuation and is a solid tax effective strategy for middle to high income earners. When you salary sacrifice, you reduce your marginal tax rate from 32.5%, 37.0% or 47.0% to a low 15% (depending on your income and your marginal tax rate).
The higher your marginal tax rate, the more tax you can save and the greater the boost to your super. As an example, if your marginal tax rate is 34.5% (including Medicare) and you want to add an additional $200 of your post-tax dollars each month to your super ($2400 over the year), then the equivalent contribution would be $3664 added to your super.
If you decided not to do this and instead, you added an extra $200 a month to your mortgage, you would only pay off an extra $2400 over a year. Of course, this doesn’t account for the reduction in your principal and the associated drop in the calculation of your interest, but dollar for dollar, the super option might be more suitable for you in the long term.
The drawback is that once you have added this extra money to your super, you cannot redraw it until you retire or if certain conditions are met.
Benefits of paying down your mortgage
On the other hand, making extra payments to your mortgage can help you save thousands in interest payments over the life of the loan, giving you not only more money in your pocket, but also the security of a mortgage free life.
With interest rates at an all-time low in Australia, paying down your mortgage as opposed to adding extra money to your super is a serious alternative and needs to be given due consideration. For many of us, living mortgage free can make a massive difference to our lifestyle, and can lead to greater financial security in the long term.
Remember however, that when you increase the amount of your home loan repayments, you are using your after tax dollars, so you lose the upfront tax benefits of adding this money to your super. For many Australians, the seduction of paying off their mortgage earlier and saving thousands of dollars on interest payments, far outweighs any tax incentives associated with salary sacrificing.
If you are unsure of which option is best for your situation, speak to your adviser who can help you make the best decision for your family.
This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.