Mortgage versus superannuation: Which should you top up?

Putting that into practice can be daunting though, and if we are fortunate enough to have some cash left in the bank at the end of each week, working out the best place for it can be confusing.

Aside from letting it accumulate in a savings account, for most people, two avenues come to mind – the mortgage and superannuation.

But, with plenty of noise around the importance of reducing debt, plus the equally loud championing of additional super contributions, confusion over which is best can easily lead to lack of action.

Superannuation versus mortgage

Which is the better option? The short answer is: it depends on your personal circumstances.

“It’s not a one-size-fits-all question, but it really comes down to comparing the growth of funds in your super fund with the reduction of debt on your mortgage,” says David Wright, founding director of the Spending Planning Institute.

“When interest rates are low most of what you pay goes off the principle,” he says.

“When interest rates are high, a much bigger slice of what you pay goes to interest. So, given that interest rates are down to around 3 per cent, there has never been a better time to attack debt.”

“But, if your super fund is returning 8 per cent, as an example, when mortgage interest rates are at 3 per cent, then it mathematically makes more sense to invest in your super fund.”

Other issues to consider are your age and your goals.

“At 30m that money growing in your super fund cannot be accessed for another 30-35 years.

“You may well be thinking at 40 that it would have been better to have paid down the ‘ball and chain’ around your neck — the mortgage — and have that as a benefit now rather, than waiting for the super fund to deliver for you way off in the future.

Then there is the question of tax advantages.

“Money going into super is more than money going off your mortgage because it is only taxed at 15 per cent, whereas most surplus income is taxed at double that and more.”

When it comes to simplicity though, honorary senior fellow at the University of Queensland Business School, Rand Low, says throwing extra cash on your mortgage is the way to go.

“For the average person, it is best to include additional payments into your mortgage because it is simple and easy,” says Dr Low.

“Additional regular payments to your superannuation may require contacting the HR department of your company, and your tax accountant, to ensure you do not be exceed the concessional cap on superannuation contributions.”

Contributing to your mortgage also guarantees a return, plus allows you to access your money immediately, should you need it.

“Mortgages provide flexibility to access your funds in case of a family or health emergency, as most Australians have a mortgage offset account or a mortgage with a redraw facility.

“In that sense, money in your mortgage is a rainy day fund.

“You are guaranteed a return of 2.5-3.5 per cent regardless of market conditions, since your mortgage is being reduced and you are paying less interest on the amount owing over time.”

But, if long-term gain is what you’re looking for, and you haven’t maximised your concessional contributions, adding extra weekly payments to your superannuation, while complicated, may save you more money over time.

“Investing in equities is riskier but over the long term is a better investment than paying off your home loan,” says Dr Low.

And with interest rates being so low, the old idea of paying off your first home, and investing afterwards, is no longer as clear cut, according to Alex Jamieson, director of AJ Financial Planning.

“If we take a typical homeowner that is paying around 3 per cent on their mortgage and on a tax bracket of 32.5 per cent, essentially the break-even point is around 4.4 per cent for general investing in their personal name.

“If they placed the funds into super, this would result in a potential lower break-even point 3.63 per cent due to the more preferred tax treatment of a deductible contribution or salary sacrificing the funds into super.

“Essentially, one needs to think about the rates of return that they might be obtained with these proceeds.

“You also need to give some thought about your risk profile and the willingness to invest these funds into growth-based assets.”

Mr Jamieson says, if possible, a combination of both options is wise.

“That way you are taking a multi-pronged approach and potentially balancing the risk with each variation.”

If you are considering contributing to superannuation, it’s important to evaluate your accessibility to capital first.

“When the funds go into superannuation, unless you have met a condition of release you will not be able to access the funds until retirement or a condition of release has been met.

“It would be important to consider building up sufficient emergency buffers in your personal name before you consider deploying large amounts of money into superannuation.”

If you happen to come into a large sum of money, through inheritance for example, Dr Low recommends popping that straight onto your mortgage.

“There may be tax complications with a lump-sum contribution to your superannuation especially if the contributions cap is exceeded.”

At the end of the day, which option you take depends on your personal goals, and your current financial position.

“Your mortgage is the cheapest loan which gives you the flexibility to use it for a rainy day or any investment opportunity.

“Superannuation allows you to minimise your marginal tax rate, but the available investment options in superannuation are limited.”