Mortgage vs super: Where should you put your extra money?
It’s an age old question – are you better off putting extra money into your home loan or super? We look at how the numbers stack up and the pros and cons of each option.
So you have an extra $200 a month and are tossing up whether you should use that to pay off your mortgage faster or top up your super. Or maybe you are expecting a tax refund of a few thousand dollars and are curious whether you’ll get more bang for your buck by adding it to your mortgage or your super.
The Canstar research team has crunched the numbers for those two scenarios to give you an idea of what the potential impact would be. Of course these are just hypothetical scenarios and the numbers will vary based on your individual situation including your age, salary, your super balance, size of your mortgage and interest rates.
Adding an extra $200 a month
As the tables show a 35-year-old who added an extra $200 to their super each month would have $74,457 more in super at age 60 than they would if they had relied on just the super guarantee.
If they added that money to their mortgage instead they would have improved their situation by $57,064. So based on these numbers adding to super gives this 35-year-old a better result. All figures are in today’s dollars.
Superannuation Balance Projection – Extra Ongoing After-tax Contribution of $200 per Month
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Base scenario | Extra $200 per month | |
---|---|---|
Starting age | 35 | 35 |
Average gross annual income | $89,123 | $89,123 |
Average starting balance | $51,740 | $51,740 |
Average annual investment returns | 6.14% | 6.14% |
Account balance at age 60 (today’s dollars) | $383,460 | $457,917 |
Difference to base scenario at age 60 | – | $74,457 |
Source: www.canstar.com.au – 13/11/2020. Based on a 35 year old with a starting balance of $51,740 per APRA Annual Superannuation Bulletin, starting gross annual income of $89,123. Employer contributions are presumed taxed at 15%. SG contribution amounts per Government announced rates. Total extra contributions over 25 years equals a total amount of $60,000. Investment returns assumed to be 6.14% p.a. and is net of fees and taxes, based on 5 year returns for balanced investment options in Canstar’s database (Sep 2020). Average annual insurance premiums are assumed to start at $265.71, increasing with inflation of 2.5% per year, charged at the end of each year based on products in Canstar’s database for an average balance of $80k and age of 35 years old. Account balances are displayed in “today’s dollars”, meaning the value is adjusted for inflation, assumed to 2.5% (RBA Target Inflation). Please note all information on income, annual superannuation fees and performance returns are used for illustrations purposes only. Actual returns and the value of your investment may fall as well as rise from year to year; this example does not take such variation into account. Past performance is not a reliable indicator of future performance.
Impact of Extra $200 Contributed to Monthly Mortgage Repayment
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Base scenario | Extra $200 per month | |
---|---|---|
Starting age | 35 | 35 |
Starting property price | $500,000 | $500,000 |
Annual property price growth* | 2.50% | 2.50% |
Interest rate^ | 4.21% | 4.21% |
Equity at age 60 (today’s dollars) | $442,936 | $500,000 |
Difference in equity | $57,064 |
Source: www.canstar.com.au – 13/11/2020. Total extra contributions over 25 years equals a total amount of $60,000.*Average annual property price growth based on annual property price percentage change over the past 5 years using ABS Residential Property Price Index (state weighted average), June 2020. ^Interest rate based on average variable, principal & interest, owner occupier, 80% LVR rates in Canstar’s database, taken over the past 5 years as of month end to October 2020. Equity at age 60 is displayed in “today’s dollars”, meaning the value is adjusted for inflation.
Adding a lump sum of $2,500
If that same 35-year-old had added a lump sum of $2,500 to their super they would have boosted their super by $11,963 by age 60. But if they had added it to their home loan they would have increased the value of their equity by $3,843. As in the previous example adding money to super has produced a stronger result.
Superannuation Balance Projection – Extra After-tax Lump Sum Contribution of $2,500
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Base scenario | Lump Sum of $2,500 | |
---|---|---|
Starting age | 35 | 35 |
Average starting gross annual income | $89,123 | $89,123 |
Average starting balance | $51,740 | $54,240 |
Average annual investment returns | 6.14% | 6.14% |
Account Balance at age 60 (today’s dollars) | $383,460 | $395,424 |
Difference to base scenario at age 60 | – | $11,963 |
Source: www.canstar.com.au – 13/11/2020. Based on a 35 year old with a starting balance of $51,740 per APRA Annual Superannuation Bulletin, starting gross annual income of $89,123. Employer contributions are presumed taxed at 15%. SG contribution amounts per Government announced rates. Lump sum contribution of $2,500 is made at the start of year 1 (i.e. age 25). Investment returns assumed to be 6.14% p.a. and is net of fees and taxes, based on 5 year returns for balanced investment options in Canstar’s database (Sep 2020). Average annual insurance premiums are assumed to start at $265.71, increasing with inflation of 2.5% per year, charged at the end of each year based on products in Canstar’s database for an average balance of $80k and age of 35 years old. Account balances are displayed in “today’s dollars”, meaning the value is adjusted for inflation, assumed to 2.5% (RBA Target Inflation). Please note all information on income, annual superannuations fees and performance returns are used for illustrations purposes only. Actual returns and the value of your investment may fall as well as rise from year to year; this example does not take such variation into account. Past performance is not a reliable indicator of future performance.
Impact of Lump Sum of $2,500 Contributed to Monthly Mortgage Repayment
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Base scenario | Lump sum of $2,500 | |
---|---|---|
Starting age | 35 | 35 |
Starting property price | $500,000 | $500,000 |
Annual property price growth* | 2.50% | 2.50% |
Interest rate^ | 4.21% | 4.21% |
Equity at age 60 (today’s dollars) | $442,936 | $446,778 |
Difference in equity | $3,843 |
Source: www.canstar.com.au – 13/11/2020. Lump sum contribution of $2,500 is assumed to be made at month 1 of the loan. *Average annual property price growth based on annual property price percentage change over the past 5 years using ABS Residential Property Price Index (state weighted average), June 2020. ^Interest rate based on average variable, principal & interest, owner occupier, 80% LVR rates in Canstar’s database, taken over the past 5 years as of month end to October 2020. Equity at age 60 is displayed in “today’s dollars”, meaning the value is adjusted for inflation.
As the examples show with interest rates at record lows there is certainly a case for tipping more money into your super than your mortgage. That’s partly because the return you are likely to get on your super will probably be higher than the interest you are paying on your mortgage.
But it’s not necessarily that simple and there is no one-size-fits-all answer to this question. Both options have their pros and cons and a lot depends on your personal situation. Here are some of the things to consider when weighing up where to put your extra cash.
Compare Superannuation with Canstar
The table below displays some of the superannuation funds currently available on Canstar’s database for Australians aged 30 to 39 with a super balance of up to $55,000. The results shown are sorted by Star Rating (highest to lowest) and then by 5 year return (highest to lowest). Performance figures shown reflect net investment performance, i.e. net of investment tax, investment management fees and the applicable administration fees based on an account balance of $50,000. To learn more about performance information, click here. Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD. Use Canstar’s superannuation comparison selector to view a wider range of super funds. Canstar may earn a fee for referrals.
- Performance, fee and other information displayed in the table has been updated from time to time since the rating date and may not reflect the products as rated.
- The performance and fee information shown in the table is for the investment option used by Canstar in rating of the superannuation product.
- Performance information shown is for the historical periods up to 31/01/2024 and investment options noted in the table information.
- Performance figures shown reflect net investment performance, i.e. net of investment tax, investment management fees and the applicable administration fees based on an account balance of $50,000. To learn more about performance information, click here.
- Performance data may not be available for some products. This is indicated in the tables by a note referring the user to the product provider, or by no performance information being shown.
- Please note that all information about performance returns is historical. Past performance should not be relied upon as an indicator of future performance; unit prices and the value of your investment may fall as well as rise.
- Any advice on this page is general and has not taken into account your objectives, financial situation or needs. Consider whether this general financial advice is right for your personal circumstances. You may need financial advice from a qualified adviser. Canstar is not providing a recommendation for your individual circumstances. See our Detailed Disclosure.
- Not all superannuation funds in the market are listed, and the list above may not include all features relevant to you. Canstar is not providing a recommendation for your individual circumstances.
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Performance and Investment Allocation Differences
- Fee, performance and asset allocation information shown in the table above have been determined according to the investment profile in the Canstar Superannuation Star Ratings methodology.
- Some providers use different age groups for their investment profiles which may result in you being offered or being eligible for a different product to what is displayed in the table. See here for more details.
- Australian Retirement Trust Super Savings’ allocation of funds for investors aged 55-99 differ from Canstar’s methodology – see details here.
- The Australian Retirement Trust Super Savings (formerly Sunsuper for Life) product may appear in the table multiple times. While you will not be offered any single investment option, this is to take into account the different combinations of investment options Australian Retirement Trust may apply to your account based on your age. For more detail in relation to the Australian Retirement Trust (formerly SunSuper for Life) product please refer to the PDS issued by Australian Retirement Trust for this product.
- Investment profiles applied initially may change over time in line with an investor’s age. See the provider’s Product Disclosure Statement and TMD and in particular applicable age groups for more information about how providers determine their investment profiles.
Paying extra into your mortgage
The pros
- By making extra repayments on your home loan you could potentially save tens of thousands in interest and also pay off your mortgage much faster. Let’s say you have a $400,000 mortgage and are paying 3.5% interest your monthly repayments would be $1,796 (assuming a 30-year term). Pay an extra $200 a month and you’d save $44,736 in interest over the life of the loan and pay it off four years and 10 months sooner. In essence this frees up nearly five years of repayments (around $115,768, including the extra $200 a month) to invest, which you could then use to supercharge your super.
- You may still be able to access your money if your home loan has a redraw facility or offset account attached to it. If you are using redraw make sure you find out if any fees apply and if there is a minimum or maximum amount you can redraw. It’s also worth noting that if your circumstances change your bank can shut down your redraw.
- It might not be a financial benefit but many people may feel better knowing they have paid off their mortgage faster and they own their home outright.
The cons
- Unlike with super there are no tax perks that come with adding money into your mortgage.
Paying extra into your super
The pros
- Making extra contributions to your super will mean you will have more money at retirement. If you are 40 years old, earn $85,000 a year and currently have $65,000 in your super invested in the default option the MoneySmart calculator estimates you’d have $425,083 at age 67 based on just super guarantee contributions. If you were to add an extra $200 a month via salary sacrifice your estimated balance would increase by $77,113 to $502,196.
- There may be tax perks that come with making additional contributions to your super. For example any before-tax money that you put into super is taxed at just 15% (as opposed to whatever your marginal tax rate is). You may also be able to claim a tax deduction if you make an after-tax contribution – something only introduced a few years ago. Jonathan Philpot, wealth management partner at HLB Mann Judd Sydney, offered this example: Say if you are earning $150,000 a year, your compulsory super contributions will be approximately $15,000 a year, so at the end of the financial year you could add a further $10,000 into your super account and claim a personal tax deduction for this. This will provide a personal tax saving of $3,900 (39%) on the $10,000.
The cons
- You generally won’t be able to access your money until you meet a ‘condition of release’ such as reaching your preservation age and retiring; reaching your preservation age and choosing to begin a transition to retirement income stream while you are still working or are 65 years old (even if you have not retired). You also never know when the rules around super may change so this may be different in the future.
What to consider when deciding where to put your extra money
There are a number of factors to think about when you are trying to figure out what is the best option for you. Here are some of the issues to consider.
Your age
Paying off your mortgage in earlier years may then allow you to make extra super contributions later with surplus cash flow when mortgage payments are reduced and income may have increased, director of WLM Financial, Laura Menschik, told Canstar. “Younger people are usually more likely to have increased expenditure over the years and may not want money tied up in super, while older people may be in a better financial position to have the surplus cash to top up super before retirement,” she explained.
How much you have already paid off your loan
“Generally people should focus on reducing their mortgage, particularly in the first few years,” suggested Mr Philpot. When you first take out a loan interest accounts for a larger proportion of your repayment than principal so the more you pay off earlier the less interest you’ll pay over the long term.
“A good goal to aim for is reducing the mortgage level to 50% of the home value before considering any other strategies with your money,” Mr Philpot told Canstar, although he pointed out this approach may not be for everyone.
“Some may wish to add more into super at an earlier stage, however one of the best investments you will generally make is owning your own home, so moving as quickly as possible through the debt repayment stage of life will then provide more time to start building wealth outside of the family home,” he explained.
When you’ll need access to your money
With money contributed to super, it may not be accessible, if required, before you meet certain conditions explained Ms Menschik. “If someone requires money before retirement, paying off the mortgage may be a better option, especially if there is a redraw facility, offset account or access to equity in the property,” she said.
Mr Philpot agreed. “Having an offset account attached to the home loan allows all savings to sit within the offset account, thus reducing the interest on the home loan but still providing the flexibility to be able to use funds for holidays and school fees, etcetera as they arise,” he said.
Interest rates
When rates are low adding money to super can be more beneficial than it would be when rates are higher. These days the rate on your home loan should be at most about 3.5% which is very different to only a few years ago when rates were closer to 7% said Mr Philpot. “With the reduced interest rate cost, the ‘hurdle rate’ of investing, on an after tax basis, has also been lowered. This makes superannuation a more attractive option to consider, as over the long term there is a good chance that your superannuation will achieve a rate of return, after tax, of greater than 3.5%,” he explained.
What makes you more comfortable
Do you like the idea of owning your home outright before you move on to other investments? “Sometimes it comes down to a personal comfort zone and satisfaction of knowing you own your own property outright. This can then be a building block to help finance other investments,” said Ms Menschik.
Or you may prefer to lock your money away if you think that having easy access to your savings may mean you’re more likely to spend it on unnecessary things. As Ms Menshik pointed out you could eventually use a lump sum amount from your super to pay off any remaining mortgage to ensure you have a debt-free retirement.
Cover image source: paulaphoto/Shutterstock.com
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This article was reviewed by our Editorial Campaigns Manager Maria Bekiaris before it was updated, as part of our fact-checking process.
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