Pay off the mortgage early, grow super or invest?
I’m a firm believer in fast-tracking your way to mortgage freedom by paying more off your home loan each month. But does this strategy stack up in today’s super-low interest environment? Let’s crunch the numbers to see.
I’ll assume you have a $500,000 home loan with a 25-year term, and an interest rate of 3%. Over the full term you’ll pay about $211,000 in total interest. By paying off an extra $50 each week, or $200 monthly, you could be mortgage-free almost three years ahead of schedule and save $25,600 in interest.
Or, you could tip that $50 into super each week. If you’re aged, say, 40, with a ‘balanced’ super fund, making before-tax weekly super contributions of $50 can mean having an extra $81,300 in retirement savings by age 67.
The difference arises because good super funds offer exposure to all major asset classes including shares. That can mean earning returns that are far higher than home loan interest rates. As a guide, the top performing super funds over the last seven years have notched up annual returns averaging 8%-plus[1]. So you’ll earn more by adding to super than you’ll save on extra mortgage repayments.
The downside is that your super is locked away until you retire . For a younger person that can be decades away. An alternative is to use that spare $50 each week to grow investments outside of super.
I’m a big fan of ETFs, which offer instant diversity at very low cost. So, let’s say you add that $50 a week (or $200 each month) into a basket of share-based ETFs. Based on long term historical returns of around 6.0% annually[2], over 10 years you could accumulate $32,800. But over 25 years, when compounding returns really kick in, you could have a portfolio worth $135,000.
Sure, these numbers don’t address basics like the impact of loan fees, tax on investment returns and brokerage. Even so, it’s clear that while paying more off your mortgage while rates are low is a smart move, it’s also worth considering other options. Growth investments including super, can give you far more bang for your buck in a low rate world.
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Frequently Asked Questions about this Article…
Paying off your mortgage early can save you significant interest, but investing in superannuation could potentially yield higher returns due to exposure to major asset classes. Consider your financial goals and time horizon when deciding.
By paying an extra $50 each week on a $500,000 mortgage at a 3% interest rate, you could be mortgage-free almost three years early and save $25,600 in interest.
Contributing an extra $50 weekly to your superannuation can significantly boost your retirement savings. For example, a 40-year-old could have an additional $81,300 by age 67.
Superannuation funds often offer higher returns than mortgage interest rates, with top-performing funds averaging over 8% annually. This can lead to greater long-term growth compared to mortgage interest savings.
ETFs provide instant diversification at a low cost. Investing $50 weekly in ETFs could grow to $135,000 over 25 years, thanks to compounding returns.
Low interest rates make paying off a mortgage less financially beneficial compared to investing in growth assets like superannuation or ETFs, which can offer higher returns.
Consider factors like your financial goals, risk tolerance, time horizon, and the potential returns of investments compared to mortgage interest savings.
Superannuation funds are generally locked away until retirement, which can be a downside for younger investors looking for more immediate access to their funds.
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