There Is No Right Way To Secure Your Retirement
On the one hand, contributing more to your superannuation fund may increase your final payout figure at retirement.
On the other, making extra mortgage repayments can help you clear your debt sooner, increase your equity position and put you on the path to financial freedom.
Super vs. mortgage
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It Depends On Your Age
People close to retirement often make extra superannuation contributions, particularly if they work out that their super balance is a bit low. They’re also more likely in a financial position to do so because they’ve paid off most of their mortgage and their children have left home. They can also take advantage of higher contribution caps, benefiting from only being hit with a concessional tax rate of 15% per annum. Comparatively, people in their 20s and 30s will more likely be in a position where their expenditure will increase. This includes the cost of university study, buying a home or starting a family. They simply don’t have disposable income, or if they do, they would rather spend it on other living expenses and luxuries.
Think About The Concessional Tax Rate
Tax implications are very important when deciding on your super or mortgage. Work out what tax rate you’re paying on your income and how it compares to the tax charged on your employer’s superannuation contributions (15% per annum). The higher your income, the higher your marginal tax rate, which means the more you’ll save when making extra super contributions. You’ll only get any benefit if your marginal tax rate exceeds the concessional tax rate of 15%. For example, if you earn over $80,000, your income tax will be around 37% plus the Medicare levy. In this instance, this would be beneficial to you. So if you’re married or in a de facto relationship and earning more than your partner, you’ll potentially save the most.
It’s Easy To Go Over The Concessional Contributions Cap
Most employers simply pay the minimum Superannuation Guarantee (SG) contribution but others contribute more than the minimum through pre-tax salary sacrificing.
Find out how much extra your employer is contributing so you don’t go over the Australian Taxation Office’s (ATO’s) concessional contribution cap.
From 1 July 2021, the general concessional contributions cap is $27,500 for all individuals, regardless of age.
Going over the cap means that any extra funds that you contribute will be taxed at your marginal tax rate plus the excess concessional contributions rate. The government sure doesn’t like to make it easy!
* This is general information only and shouldn’t be taken as financial advice. Concessional caps and excess contribution rates change on a regular basis so it’s essential you speak with your accountant before making extra contributions to your super account. This should form part of a larger financial plan that you discuss with a qualified financial adviser.
Benefits Of Salary Sacrificing
Let’s say you earn $90,000 per year in gross income (before tax).
Your taxable income plus the Medicare levy would work out to be around $66,953 per year or $2,575 fortnight.
As part of a salary packaging scheme with your employer, you sacrifice around $60 a fortnight or around $1,500 per annum from your take home pay (after tax) as an extra contribution to your super.
This yearly salary sacrifice before tax would be around $2,097.
Paying the concessional tax rate of 15%, an extra $1,782 would be paid into your superannuation.
Ultimately, the $60 that you decide you don’t need for your living expenses could either amount to a yearly $1,500 reduction in your home loan a $1,782 boost to your superannuation.
* The following figures are based on marginal tax rates and the Medicare levy as at 6 October 2016. It doesn’t take into account the deficit levy, HECS/HELP debt that you may have or any tax offsets you may be eligible for.
What If You Need The Extra Money Back?
Super or mortgage: which is a more flexible option?
Apart from staying within the concessional caps to get the biggest tax benefit, you simply cannot release any of your super funds until you retire (although exceptions do apply).
So if you have a personal emergency or need to pay some other kind of expense, you’re up the proverbial creek.
The great thing about most home loans (professional packages) is that they come with free redraw up to a certain limit.
By putting extra funds into a linked offset account, you’re “offsetting” your interest bill.
This is really beneficial at the start of the life of your mortgage when your interest payments are much higher.
The good news is that you have access to these extra funds if and when you need them.
Where Is Your Mortgage At Currently?
Your current home loan balance, interest rate and the fees and restrictions in making extra repayments will make all the difference when weighing up the pros and cons.
This is particularly true if you’re currently paying off a fixed rate loan where break costs can apply.
There Is No Tax Benefit In Making Extra Mortgage Repayments
Making extra home loan repayments is not the same as salary sacrificing: there is no immediate tax benefit.
In addition, any extra repayments that you make can be easily withdrawn again via a redraw facility or an offset account.
If you’re not disciplined enough, or your current expenses won’t allow you to, it’s very easy to lose the benefit of making extra mortgage repayments.
Comparatively, extra super contributions are locked away until you retire.
The Problem With Comparing Super Returns And Your Interest Rate
The average return of your super fund over the past 5-10 years may give you an idea of what your final payout figure may look like when your retire.
You can then compare this to your current mortgage interest rate to get an idea of which option is better for you.
Be careful though: past super fund performance is not a reliable indication of future performance.
In addition to this, most people won’t be paying the same interest rate over a 5-10 year period.
More than likely, you will refinance and switch lenders during that time.
Personal and financial situations can change very quickly but the benefit of making extra repayments is that you’ll see the benefit of making extra mortgage repayments much sooner.
Because you’re paying more than the minimum mortgage repayment, you end up paying less in interest and more off your principal loan amount (the interest-free component).
So just paying an extra $100 a month will save you thousands in interest.
Check out the extra repayments calculator to get an idea of how much you could save.
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 by no means an entirely sure way to financial freedom and securing your retirement nest egg. Then again, neither is investing more than the minimum in superannuation.
You should speak to your financial adviser if you’re considering either investing in property, paying off your mortgage faster or making extra super contributions.
What If I’m Self-employed?
Are you a contractor or do you run your own business?
You can claim the same salary sacrificing tax benefit when contributing to your superannuation.
On top of that, if you earn less than a certain threshold, you may qualify for a government co-contribution.
Check out the ATO website for more details.
Final Golden Tips
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. Life is complex so it pays to have a financial adviser on your side before you make any big financial decisions when it comes to your super or mortgage. 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.
Please call us on 1300 889 743 or complete our free assessment form to discuss your situation with one of our mortgage brokers.