Should I Pay Extra To My Mortgage Or Contribute To Super?

While contributing more to your super can increase your final payment at retirement, making extra repayments on your mortgage can help you clear your debt sooner.

We’ve outlined a few details you should consider before deciding which choice is better for your situation.

What You Need To Consider

Which Gives More Savings?

Scenario 1: Mortgage Repayment Savings

Mortgage Amount: $500,000

Interest Rate: 6% per year

Loan Term: 30 years

Extra Repayment: $500 per month

By making an additional $500 monthly repayment:

• Interest Savings: You could save approximately $199,503.45 in interest over the life of the loan.
• Loan Term Reduction: You would pay off your loan 9 years earlier, reducing the term from 30 years to about 21 years.

Scenario 2: Superannuation Contribution Savings

Income: $100,000 per year

Additional Contribution to Super: $10,000

Tax Details:

Marginal Tax Rate: 32.5%

Superannuation Tax Rate: 15%

By contributing $10,000 to super instead of keeping it as taxable income:

• Tax Savings: You save approximately $1,750 in taxes.
• Super Returns: Assuming a 7% annual return, your $10,000 contribution could grow to approximately $9,671.51 in returns over 10 years.

Paying Off Mortgage Instead Of Contributing To Super

Here are some reasons why paying off your mortgage might be a better option than contributing to your super:

High Interest Rates

In a high-interest rate environment, paying off a mortgage might be better, especially if expected returns from the super are lower than the mortgage rate.

Invest In Property Sooner

By making extra mortgage repayments, coupled with the increase in the value of your property, you’ll build equity in your property at a faster rate than if you were to make just the minimum repayments.

By doing that, you can refinance your home loan to a cheaper rate much sooner and even release some of the equity you built up to buy an investment property.

Investing in the property market is not an entirely sure way to financial freedom and secure your retirement nest egg. Then again, neither is investing more than the minimum in superannuation.

Contribute To Super Instead Of Mortgage

Here are some reasons why contributing the extra funds to your super might be a better option than paying off your mortgage:

Tax Efficiency

Contributions to superannuation can often be made using pre-tax dollars, which allows individuals to benefit from tax concessions. For example, if you earn $80,000 and contribute an extra $1,000 to super, this amount is taxed at only 15%, rather than the higher marginal tax rate applied to regular income. This means that more of your money is working for you in super compared to the after-tax dollars used for mortgage payments.

Retirement Planning

For individuals close to retirement age, contributing to super can be particularly beneficial. Once they reach retirement age, they can access their superannuation tax-free and use those funds to pay off their mortgage or cover living expenses.

Final Tip

Whether you decide to put more into your super or mortgage, you need to pay off your home loan before you retire. At the same time, you have to consider whether you’ll need to access any additional funds you put aside before you reach retirement. If it’s super, it’s locked away. If it’s in your mortgage, there are options to redraw.
In most cases, there isn’t one set strategy that you should follow and it can quickly change as you grow older, start a family and reach retirement age. If you’d like help in running extra mortgage repayment figures, what home loan features would be beneficial to you or whether you’re in a position to refinance, get in contact with us.