The decision between living debt free and having sufficient savings for retirement is often a difficult one.
There are benefits to allocating money to both your super and your mortgage. Take your personal circumstances into consideration with the following pros and cons of each:
Paying down your mortgage may seem favourable for many homeowners but proceed with caution. It is wise to check if your mortgage has restrictions on making additional repayments. If it does not have extra costs, making additional repayments may be beneficial as you’ll reduce your total interest and pay down your mortgage quicker.
Another benefit of extra mortgage repayments is the ability to redraw extra repayments if you need cash in the future. Paying down your mortgage also means your house equity will increase. House equity can be used to take out a line of credit for significant costs such as a renovation or can be used towards the purchase of another property, i.e., a holiday house.
Making extra repayments towards your mortgage is generally a good approach to reducing the interest paid on your loan and ensuring your mortgage is paid off before retirement.
Contributing to your nest egg via salary sacrifice is tax effective and can make a big difference to your balance, and ultimately, your lifestyle come retirement. Those earning a marginal tax rate higher than 15 per cent will benefit the most from salary sacrificing. For example, if you earn $80,000 a year your marginal tax rate is 32.5 per cent plus the Medicare levy.
Say you decide you can spare $1,200 a year from your after-tax income, this equates to $1,832 before tax. If you salary sacrificed $1,832 into super, paying only 15 per cent tax, $1,557 would go into your super fund. Where salary sacrificing is not feasible, you can make additional contributions from your after-tax income, although it doesn’t have any tax advantages.
Making additional super contributions has its risks and limitations. Super fund returns can fluctuate regularly and probably more than your current mortgage rate. There are also contribution caps on the amounts of super you can contribute each year and there will be additional tax where you exceed contributions.
One way to compare super contributions against contributions to your mortgage is to compare the 7 or 10 year long-term average after-tax return on your super to your current mortgage rate.
For further advice please Contact your financial planner or superannuation adviser.