Home loan or super, which is better?

Home loan or super, which is better?

Utilising surplus cash flow to pay off the home loan more quickly is a strategy adopted by many people. However, making additional contributions to super may just leave you better off.

Paying off your mortgage or contributing to super are both good options. The question is, which is better for you? The answer is entirely dependent on your personal circumstances.

Choosing super over the home loan

So how could making extra super contributions instead of extra home loan repayments be a better option?

1. Boosting your super

– Contributing to super can mean more money to fund your retirement; that is, a more comfortable retirement lifestyle.

– By making extra contributions you can take advantage of the concessional super contributions cap.

The current cap on concessional (before-tax) super contributions is $35,000 per financial year if you were aged 49 or over on 30 June in the previous financial year, otherwise it’s $30,000 per financial year. Exceeding this cap incurs a penalty.

2. Tax effectiveness

Contributing to super instead of making mortgage repayments may be a more tax-effective use of your surplus cash.

– If your marginal tax rate is higher than 15%, ‘giving up’ some of your pre-tax pay by salary sacrificing into super will save you tax, or;

– If you are eligible (self-employed or not employed), you may be able to claim a 10% deduction on super contributions.

The below table shows how these tax benefits could result in you having more to invest if you contribute to super rather than make extra mortgage repayments.

  CC into super Home loan repayment at marginal tax rate (MTR) of:
34.5%* 39%* 49%*
Pre-tax income $1,000 $1,000 $1,000 $1,000
Tax at MTR Nil ($345) ($390) ($490)
Tax on super contribution* ($150) Nil Nil Nil
Net amount to  invest in super or reduce debt $850 $655 $610 $510

*Includes Medicare Levy and Temporary Budget Repair Levy where applicable. Also assumed that the Concessional Contributions cap  is not exceeded.

Source: MLC Limited (2015), Super or the mortgage?

Extra mortgage repayments

Reduces interest payable on your home loan

Paying off your mortgage more quickly by making extra repayments reduces the total interest you pay. It also means that you will free up cash flows sooner.

How do you know which is better for you?

There is a case for either strategy and the best strategy for you comes down to your personal circumstances, including your:

– Age

– Risk tolerance – super involves investment risk while making extra mortgage repayment is a low risk strategy.

– Cash flow position

– Liquidity needs – will you need to access the money in your super?

– Work intentions

Please note that the information provided in this blog has been provided as general advice only. We have not considered your personal financial circumstances, needs or objectives. Most importantly, seek advice on superannuation, home loan and related tax matters from a licensed professional financial adviser before making any decisions.