Should I pay off my mortgage or contribute more to super?
Posted on 09/07/2018
Depending on your age, income, interest rates, returns and personal circumstances, either super or your home loan may be the best place for your spare money. There are pros and cons for both options, so we will consider how they relate to you.
Reducing your mortgage
By repaying your home loan you will reduce your overall amount of debt, which will result in a reduction in the amount of total interest paid.
As your home loan is paid off, the equity in your home is likely to grow, providing you with the opportunity to use this for other investments.
Generally, you use after tax dollars with home loan repayments. Nevertheless, there can be a tax advantage when you sell your home, as any profit is tax free if it’s your primary residence.
You may be able to redraw extra repayments you’ve made, if your circumstances change and your home loan offers a redraw facility. However, it is a good idea to check with your lender as there may be restrictions or fees that apply.
Adding to your super
Money from superannuation generally isn’t accessible until retirement, providing less flexibility in terms of access. However, you can change your investment options at any time, providing flexibility in how your money is invested.
A powerful way to build long-term wealth is compound interest, which is suitable for people who are far from retiring.
Tax benefits from contributing to super:
Less tax is applied to the portion of income going into super – currently 15% (or 30% if you earn more than $250,000 per year), which is lower than most people’s income tax rate.
As some of your salary is going directly into super, you’ll lower your taxable income and that could save you from paying higher rates of tax.
Furthermore, earnings from investments are generally taxed at a maximum rate of 15% - which is typically less than income tax rates. When withdrawing your super, it can also be tax free. For instance, if you turn 60 and choose to withdraw it.
Assess your financial situation
Your super investment returns can fluctuate, while a variable home loan interest rate can change, as can your home’s value. The value of your home and super can therefore be affected by economic changes.
General Advice Disclosure: This document contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser, AMP Financial Planning and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information.