Super-sized question for future prosperity
The others can wait because this is one little mystery with an answer.
The younger and poorer you are, the better it is to pay down the mortgage.
So far, so good. But think twice about locking it all in at a low fixed rate, even though that'll save money straight away.
Gosh, what am I saying? Fix if your lender lets you make extra repayments, as does CUA. Otherwise, find a cheaper variable rate (hint: UBank is at 4.87 per cent) and use the saving to pay more off. That'll save you a lot more over time. Trust me, you'll be grateful later.
On incomes below $37,000, super will save you a miserable 4 per cent in tax on what you put in - it's tax-free while it's there for half a century, but who's counting?
As you get older and richer, the more compelling salary sacrificing into super becomes, helped by the fact it's less of a wait before you can collect your booty tax-free.
There, that covers the young, old, rich and poor.
OK, what about us? Well, as Kevin Rudd would say: "Guess what? It doesn't matter."
There are great tax breaks, even with the mortgage. The interest saved by paying more off, or, better still, sticking money in an offset account in case you need it later, can't be taxed.
But that's only the half of it. Paying down a 6 per cent loan is the same as earning between 7.5 per cent and 11 per cent from an investment before tax.
And you don't need me to point out that would require a whole lot of extra and pointless risk, though I will anyway.
Can super top that?
Yes, surprisingly - but only because it has longer to play with.
Salary sacrificing to super is taxed at a flat 15 per cent (or 30 per cent on incomes above $300,000), instead of 20.5 per cent to 46.5 per cent with Medicare. And the low rate of tax of 15 per cent on earnings in the fund is the black box behind super's zing. Give it long enough and super always grows over time because the lightly taxed earnings and interest are reinvested, continually expanding the size of the pool. So while paying off the mortgage feels right, super saves the most.
Extra repayments first have to come out of your take-home pay, but not so with salary sacrificing to super.
You can get more in - up to government decreed limits, that is - because your pay is taxed less.
This makes a huge difference in super's favour, though only you can know whether it's worth the downside of locking your money away for so long.
But in the top bracket, the advantage of salary sacrificing into super over paying off the mortgage can be a whopping 60 per cent upfront.
How can that be? Salary sacrificing $10,000 leaves $8500 in your super fund.
But paying off the mortgage comes from your after-tax pay, leaving $5300.
Still can't decide? A tipping point suggested by Suzanne Haddan of BFG Financial Services is having at least 50 per cent equity in your home before you even think about super.
Oh, and to be on the safe side, make sure you're ahead in your repayments.
Read David Potts in Weekend Money, with The Sunday Age every Sunday.
Twitter @money potts
Frequently Asked Questions about this Article…
It depends on your age, income and goals. The article suggests younger and lower-income investors usually benefit more from paying down the mortgage, while older and higher‑income earners often gain more from salary sacrificing into super because of the tax advantages and compounding inside super. Also consider access to money — mortgage repayment reduces debt now, super locks funds away until retirement.
Salary sacrificed contributions are taxed at a flat 15% in super (30% for incomes over $300,000), compared with marginal income tax rates of roughly 20.5% to 46.5% plus Medicare if you take it as salary. That tax difference is a major reason super can outperform paying down a mortgage for higher earners.
Yes — paying off a 6% loan is roughly equivalent to earning about 7.5% to 11% on a pre‑tax investment, because interest saved is effectively tax‑free. Achieving that level of pre‑tax investment return would typically require taking on extra risk, which is why mortgage repayment can be attractive.
Fixing can save you money immediately if rates are low, but you may lose flexibility. The article advises fixing only if your lender allows extra repayments (CUA is given as an example). If you can’t make extras, consider a cheaper variable rate (the article mentions UBank at 4.87%) and use the monthly savings to make extra repayments.
Putting money in an offset account reduces the interest you pay on the loan while keeping the cash accessible — and the interest saved is tax‑free. The article suggests using an offset account as a better option in some cases because it preserves access to funds while delivering mortgage interest savings.
A practical tipping point mentioned in the article (from Suzanne Haddan of BFG Financial Services) is to aim for at least 50% equity in your home before prioritising extra super contributions. Also ensure you’re up to date with mortgage repayments before locking money away in super.
Not always. While super benefits from low contribution tax and lightly taxed earnings that compound over decades, the advantage depends on your income, mortgage rate and need for access to cash. For lower incomes (under about $37,000) the immediate tax savings from super may be small, and paying down a high‑interest mortgage can feel like the better, lower‑risk choice.
The article gives an example where salary sacrificing $10,000 leaves $8,500 in super after the 15% contributions tax, while making that payment from after‑tax income might leave only about $5,300 to put toward the mortgage — illustrating an upfront advantage that can be substantial for high‑income earners.
Call 1300 880 160
Start a chat
Schedule a call
