When deciding whether to pay off a mortgage or contribute to superannuation, especially for a high-
income earner like yourself (earning over $150,000 per annum), there are several factors to consider.
Each option has its own set of advantages and disadvantages depending on your financial
situation, goals, and preferences.
Below is a comparison to help you weigh the two options:
Option 1: Pay Off Your Mortgage Early
Advantages:
Guaranteed Savings on Interest:
Paying off your mortgage early reduces the total interest paid over the life of the loan, especially if
you’re on a variable rate. The interest saved is a guaranteed return.
For example, if your mortgage interest rate is 6%, paying down the mortgage is like earning a 6%
return, tax-free.
Debt-Free Sooner:
By paying off your mortgage, you can become debt-free earlier, giving you financial freedom and
reducing the burden on your cash flow. This can be especially appealing close to retirement.
Psychological Benefit:
For many, the sense of security from owning your home outright is a major benefit. It reduces
financial anxiety and provides peace of mind.
Improved Cash Flow:
Once the mortgage is paid off, your monthly cash flow improves significantly, as you no longer have
to make loan repayments.
Disadvantages:
Missed Investment Growth:
If your superannuation investments return more than your mortgage interest rate, you could miss
out on potential long-term growth. Over the long term, super investments (especially shares)
typically return around 7-10%, which may be higher than your mortgage rate.
Lack of Liquidity:
Extra payments towards your mortgage are tied up in your home equity and can be difficult to
access. You won’t have the flexibility of cash in case of an emergency unless you have a redraw or
offset facility.
No Tax Benefits:
There are no tax deductions for paying off your home mortgage in Australia, unlike superannuation
contributions, which may come with significant tax advantages.
Option 2: Contribute More to Superannuation
Advantages:
Tax Benefits:
Contributing to super can offer significant tax savings. Salary-sacrificed contributions are taxed at
15%, which is lower than your marginal tax rate (47% for income over $190,000, and 39% for income
between $135,001 – $190,000). This creates an immediate tax saving, effectively boosting your
returns.
For example, for every $1,000 contributed to super, instead of paying $470 in income tax personally
(at a 47% tax rate), you pay only $150 in contributions tax, via your superannuation fund.
Long-Term Growth:
Superannuation is a tax-effective investment vehicle. Over the long term, returns from super
investments, especially growth-oriented ones, tend to outperform the interest paid on a mortgage.
Australian super funds have averaged long-term annual returns of around 7-10%.
Compounding returns inside super can significantly grow your retirement savings, due to tax savings
on income and the ability to earn tax franking credits in your superannuation fund.
Diversified Investment:
Superannuation allows you to invest in a diversified portfolio of assets, including shares, property,
and bonds, which can provide superior returns over time compared to simply reducing a debt
burden.
Disadvantages:
Access Restrictions:
Superannuation is a long-term investment and is generally inaccessible until you reach preservation
age (currently 60 in Australia). If you need funds before then, for emergencies or other needs, you
won’t be able to withdraw money from super, unless you meet very strict criteria.
Market Volatility:
Super investments are subject to market risks, especially if you have a significant exposure to
equities. While the long-term returns are likely to outperform a mortgage, there are periods of
volatility, and your super could lose value in the short term.
Less Immediate Debt Relief:
Unlike paying down your mortgage, contributing more to super doesn’t immediately reduce your
debt obligations. You will still need to make your mortgage payments, which might feel burdensome
if you’re prioritising long-term savings over short-term relief.
Key Considerations for Your Situation:
Interest Rate on Your Mortgage:
If your mortgage interest rate is low (e.g., under 4-5%), the benefits of paying it off early may be less
compelling compared to the potential long-term growth you could achieve by contributing more to
super.
On the other hand, if rates are high, paying down the mortgage may be more attractive.
Your Age and Time to Retirement:
If you are closer to retirement, you might prefer boosting super contributions to take advantage of
the tax concessions and compound growth before retirement.
If you are further from retirement, paying off your mortgage first might give you peace of mind and
free up future income for investment purposes.
Comfort with Risk:
Contributing to super involves exposure to investment risk. If you’re comfortable with market
fluctuations, the potential growth of your super may outweigh the guaranteed savings from paying
off the mortgage. However, if you prefer certainty, reducing your mortgage may be a better option.
Tax Planning:
High-income earners can benefit significantly from salary sacrificing into super due to the tax
savings. You could direct a portion of your income to super (up to concessional contribution limits)
while still maintaining regular mortgage repayments.
Combination Strategy:
Many financial planners recommend a balanced approach. You could increase superannuation
contributions to take advantage of tax savings and investment growth while also making extra
mortgage payments to reduce interest over time.
A popular strategy is to:
Maximise concessional super contributions (up to the annual cap of $30,000).
Direct any additional funds towards paying down the mortgage.
This way, you benefit from both tax-efficient super growth and mortgage interest savings.
Conclusion
Superannuation Contributions: Offers long-term growth potential and immediate tax savings but ties
up funds until retirement.
Mortgage Repayment: Provides certainty and debt reduction but may forgo higher returns from
super over time.
Your decision ultimately depends on your financial goals, risk tolerance, and retirement timeline. It
may be beneficial to consult with a financial planner to create a tailored strategy that balances both
priorities.
Should you require further information about Mortgage and Super, please feel free to contact Peter
Quinn by submitting an enquiry or calling us on +61 2 9580 9166 to book an obligation-free
appointment.
The information in this document does not consider your personal objectives, financial situation or
needs, so you should consider its appropriateness regarding these factors before acting on it. It is
important that your personal circumstances are taken into account before making any financial
decision, and it is recommended that you seek assistance from your financial adviser.