SUPER vs MORTGAGE

First things first… if you’re still having trouble meeting your mortgage repayments, or you haven’t yet set up a Rainy Day fund, then you need to focus on these two tasks and only then revisit the super versus mortgage dilemma.

The current higher interest rate environment does generally mean we should place a little more emphasis on making extra repayments and sitting more cash in the mortgage redraw or offset account. This is simply due to the fact that by doing so, we are getting a better return on that money than we were a few years ago (when interest rates were low). And this thinking is somewhat in line with old wisdom where we would always pay off our debts and then begin investing elsewhere.

The great thing about putting extra cash reserves against your mortgage is that you can see the money sitting there, knowing it is saving you from paying the lender interest #winning

We also like the idea of putting more cash reserves against your mortgage due to the fact that you still retain access to these funds. Life is a journey where change is the only certainty, so perhaps some money is needed in the short to medium term.

The counter argument in favour of super is that for every dollar you have saved and put against your mortgage, you have already had to pay the tax man his cut (on average a marginal rate of 32%) and the return you can expect in the short to medium term is likely in the vicinity of 5%. Still not bad given this is as near risk free as an investment return can get.

If you were to forego putting extra money against your mortgage and instead salary sacrifice into super, you start winning straight away as the tax man only takes 15% of your hard-earned money. If you are the average wage earner in Australia, that’s a saving (or return) of 17% before you have even decided as to how you will invest your money within super. And when you do go and invest the money into super, it’s not going to simply sit against a mortgage.

For most investors, the majority of their money in super will be invested into growth assets, being predominantly shares. Over the long term, the financial returns here can be expected to be a little higher than those currently being achieved against the mortgage (but not by a huge amount, given current interest rates near 6%). Given investing is considered riskier than sitting money in a bank account against your mortgage, you would want and expect a better financial return (for the extra risk). We would suggest that at this time (with interest rates where they are), it really is the tax benefits of salary sacrifice that make the strategy desirable (not the returns on the investing itself). Being able to get an extra $17 out of every $100 invested and working for you can make a big difference over time (this assumes you are on the most common marginal tax rate of 32%).

It’s really important to remember that any money you put into super cannot be taken out until you meet what is known as a condition of release. For most of us that will be when we retire between age 60 and 65, or when we reach age 65 and continue working.

So, as to whether you should be putting more into super or the mortgage, we have a simple guide…

• If you are aged 50 or over your focus needs to be more aligned with making extra contributions into super (using salary sacrifice or deductible contributions)
• If your mortgage is now less than 50% of the value of your home (and deemed under control) you may wish to start considering extra contributions to super

There are also some other variables you may need to consider:

• It is very reasonable to take the approach of building up your super as much as possible at the short-term expense of becoming debt free prior to retirement. Based on historical returns, it can be justified to maximise the tax savings and investment returns achieved in super and then simply use a lump sum of super benefits when you retire to pay off your mortgage. For many, this may cause a lack of sleep and therefore wouldn’t be suitable, but for others it’s a very prudent financial strategy
• If you earn a large salary your employer may already be making contributions that go close to maximising your concessionally taxed contributions to super, meaning there’s less scope for more concessionally taxed super contributions and there’s also the argument that you may not need more money in super (as by age 60+ it’ll be sufficient to address your retirement needs)
• If you wish to reduce work commitments prior to age 60 or 65, you may wish to focus on storing cash reserves against your mortgage instead of putting more into super, given this money can then be accessible later on when you plan on needing it I.e., to scale back work and start using some savings to fund life
• It is always important to consider your spouse’s financial situation when making these financial decisions, as well as any other plans you may have outside of building wealth and paying down debt

At the end of the day, as we’ve said before, the most important takeaway here is to give this thought and then TAKE ACTION. And from our experience, most people who have available cashflow end up putting some more money into super, whilst at the same time putting some extra savings against their mortgages (a balanced approach).

Please remember that when contributing to super via salary sacrifice that there is a limit to how much the government will allow you to take advantage of their generosity. The current cap on tax-effective contributions is set at $30,000 for the financial year, BUT DON’T FORGET this will include those contributions made by salary sacrifice (or tax-deductible contribution if contributing a lump sum) AND your employers’ contributions of 12% of your salary.

If you have questions, we hope to have answers, so please shoot us an email if you need support.

Cheers,

Dan and Dave