Mortgage or super: if you have some spare cash, where should you put it? It was a question posed recently on my News Corp Gen Y column, and the truth is that there’s no right or wrong answer. Both strategies have tax benefits and both strategies have some disadvantages, so let’s look at each.
The case for putting more money into superannuation
Superannuation is a popular investment destination; something the SMSF statistics are testament to. The most recent ATO quarterly self-managed super fund statistical report (March 2015) shows that there are currently more than 550,000 SMSF funds in Australia, catering for more than one million members. With a population of just 17 million between the ages of 20 and 85, that’s pretty impressive.
So there is no doubt that many of us are happy to put money into superannuation – and to manage it ourselves.
Is an SMSF right for you?
Salary sacrificing money into superannuation has the benefit of a juicy tax concession; before-tax money that you tip into super is taxed at just fifteen percent (as opposed to whatever your marginal tax rate is – for most people it’s 34.5 percent, including Medicare levy). So already you’re ahead. Some examples, based on the current marginal tax rates plus Medicare levy, are below:
$1,000, after tax equates to…
|Super contribution tax||$850|
|19% MTR + Medicare||$810|
|32.5% MTR + Medicare||$655|
|37% MTR + Medicare||$610|
|45% MTR + Medicare||$530|
An extra $85 per week into your superannuation fund for thirty years, at an earning rate of six percent, could give you an extra $370,000 at retirement.
The case for putting more money into your home loan
Buying a home is challenging and if you are in the early years of home ownership you may well be mortgaged up to the hilt.
If you do have a large mortgage then any extra money that you can tip into your home loan, especially while interest rates are low, can save you a huge amount of interest over the life of your loan.
Assuming you have an extra $100 before tax per week to allocate to either superannuation or your home loan. If your marginal tax rate was 32.5% plus Medicare levy, it would result in around $65 per week after tax, to allocate to your home loan. Currently on the canstar.com.au database, the average variable mortgage is 4.60% (you can compare home loan rates here). On a $300,000 home loan over 30 years, an extra $65 per week can pay your loan off eight years sooner and save around $79,000 in interest. It will also free up eight years of repayments (around $174,000) to invest, which you could then salary sacrifice and use to supercharge your super.
All up, the result would likely be similar.
Learn more about Super
If you are currently in the market for a super fund, or are considering switching, check out our comparison table below which offers a snapshot of the current market. Please note that this table has been sorted by our star rating (highest to lowest, A-Z) and is based on the policy holder being aged between 30 and 39, with a super balance of $55,000 to $100,000. You can try this tool for yourself here.