Deciding on shares or the house

Its been so cut and dried for the past few years: shares, bad paying off your mortgage, good.

But somethings changed  mortgage interest rates are again approaching record lows and maybe, just maybe, the latest Greek deal will see stability return to our equity markets. Certainly theres talk of a pre-Christmas rally in confidence.

Whats more, we all know the time to invest is before shares recover, not when theyre flying sky-high again.

The most tax-effective way to do this is through your super. And, indeed, whether you appreciate it or not, youve been drip-feeding money into the market in this way the entire global financial crisis (a great technique to buy lots of shares at cheap prices in what we boffins call dollar-cost averaging).

The question is whether its now time to forgo the mortgage in favour of paying into the market, via super, even more.

THE REALITY

If youre savvy, your mortgage interest rate is no more than 5.5 per cent. This is below even the dividend yield on many Aussie shares, but well leave that to one side its the tax breaks afforded to super that give it a guaranteed advantage (well, guaranteed until the next government raid).

Lets assume you are 35, earn $80,000 a year and have a 25-year, $300,000 home loan on the above interest rate.

If you switch from making an extra $500 a month payment into your mortgage and instead salary-sacrifice that amount into super, at age 65 youll be more than $50,000 ahead, with an additional $286,483 in your fun fund. The alternative home loan saving would have been $236,368.

This assumes only modest total annual super returns of 7 per cent, but does capture just how generous super tax breaks are. You pay no income tax on sacrificed contributions but (on incomes below $300,000) a super contributions tax of just 15 per cent. However, leave it to age 55 and super still wins, but by only $26,508, with a balance swollen by just $83,047.

How do the figures change if your mortgage is larger? The super outperformance is bigger as your home loan overpayments make a smaller dent.

And what about on higher incomes and, therefore, tax brackets? Super streaks further ahead here, too, with the tax savings. For instance, on a $200,000 income from age 35, its $68,646 better to boost your super, with ultimately $316,947 more in your retirement kitty. However, if you get to the trigger income of $300,000 for contributions tax to double from 15 per cent to 30 per cent, the benefit will clearly diminish.

I shouldnt have to say, but I will, that you need to be on the lowest-available mortgage interest rate for the super strategy to yield the highest-possible benefit. If you do not pay a market-leading rate of 5.5 per cent but one more akin to what the big banks are advertising  6.5 per cent  your eventual edge drops from more than $50,000 in our original example to just $29,814.

Should your home loan rate climb back to 7.7 per cent, and super returns fail to correspondingly surge, thats the point at which knocking off the mortgage might start to become more attractive.

THE REASON

Of course, while it might be mathematically compelling to pay spare cash into super, there are other considerations. Security, obviously, is a big one.

The surest way to protect you and your family should things unexpectedly go wrong  say, your income ceases or you find yourself with an astronomical bill  is a fully paid-off roof over your head. This frees you from having to find a big monthly repayment, which means you need only cover bills and expenses to survive.

By contrast, pay all your cash into super and you usually cannot access it until age 65, except under extreme hardship provisions that could prove difficult to satisfy.

While you might come out ahead on paper with super, this is a big consideration.

And if you carry higher-interest debts such as credit cards, the pendulum may well swing in favour of paying these off before you attack anything else, mortgage or super.

THE RESULT

Ultimately, then, it will come down to your own situation. How old you are how important it is to preserve your cash how quickly you will need to get at it and more.

You can assess all this  along with your particular circumstances  on the fabulous calculator at ASICs MoneySmart website (moneysmart.gov.au). Who knows: switch your excess cash to super and you may even catch a recovery.