Forget Super Until You’ve Paid Off Your Mortgage

December 21, 2016

Forget Super Until You've Paid Off Your Mortgage

The value of money is always fluctuating. This means that advice about how to best invest and use it should also be changing just as fast, in order to get the most benefit from it. This also applies to whether or not it is more important to invest in your super or to pay off the mortgage.

Super or Payoff Mortgage?

This certainly has been a question for debate for a long time, and it is no less so today. For the most part, many have advised that you should work harder on putting money into your super.

When focusing on the super, you benefit from the deductions in taxes because any money put into it is tax exempt. This is especially true for those people who salary sacrifice their contributions.

When looking at the average person who has the majority of a mortgage still to pay, say around $300,000, and at least 20 years left on it, investing in the super is clearly the better idea. It does assume that you have an extra $400 or so to spare each month, and are making about $80,000 yearly. In this case, you would save about $60,000 by investing more in your super.

The savings in taxes, in the example above, are seen when you pay only the 15 percent tax on your money put into the super, instead of the 32.5 percent, which is the tax at that income level. People who make even more money, around $300,000 annually, need to remember to decrease their taxable income by $50,000 by investing it into the super, which will enable them to save an extra 15 percent tax on contributions.

Consideration for the Changes in Life

When you are deciding whether to invest in your mortgage or super, take a few minutes and look at life realistically. Every now and then, you may have a real need for money in an emergency or unexpected situation. Money in your super is not available until you reach retirement, and that age is becoming higher over the years.

Money that you put toward your mortgage, but not actually in it, is available. By using an offset account, you get the combined benefit of reducing your mortgage and also having cash available for emergencies. All the money in an offset account earns interest at the same rate as your mortgage, and it is used to reduce the interest you owe. For instance, if you had a $250,000 mortgage with $50,000 in an offset account, you would only need to pay interest on $200,000 of the home loan.

Advantages of Paying Off Your Mortgage First

The clear advantage here is that you can withdraw your money from the offset account at any time. You also are not paying income tax on the interest earned.

Another advantage to concentrating extra payments toward your mortgage is that your home is your own when the mortgage is paid in full. It will free up a lot more money when this happens and you can invest larger sums into your super afterward.

One more advantage is that you have the opportunity now to reduce your mortgage faster because interest rates are lower. This lets you put more toward it when rates and the payment size is lower, which enables you to reduce it faster than when rates are higher. Some banks have already raised their rates and more are expected to join them.

How Refinancing May Help

If you are paying a higher rate of interest than that which is currently available, or are struggling to make your regular payments now, it may be a good time to refinance your home loan. Rates are expected to go up soon since Westpac has already raised theirs. You could benefit by getting lower payments, a lower interest rate, and then, if you keep your payments the same size, this would enable you to save tens of thousands of dollars over the life of the loan.

It is a good idea to pay off your home loan and make your home secure. Since you already have money going into your super, let it suffice for now and get your home paid for first.

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