It’s an age-old question for anyone who is financially planning for the future: should I pay down my debts or add to my savings?
When you’re choosing between paying off a mortgage and boosting your super, the stakes are even higher. Throw in the fact that you may be currently setting up for retirement (as 430,000 Australians are1) and you’ve got a huge decision on your hands.
Let’s examine the issues at the heart of the mortgage versus super conundrum.
Any additional contributions you make towards your super will be locked away until you retire. That means you may struggle to access your cash if an investment opportunity or emergency arises.
Many mortgages have a redraw facility, ensuring any overpayments you make towards a home loan can be withdrawn at a later date. This kind of flexibility can be crucial, but you’ll have to be careful to avoid drawing out equity for frivolous reasons.
Debt recycling (a form of ‘good’ debt) is one way of using the capital tied up in your home to create a positive income stream if you’re worried about having enough money for retirement. Whether or not this is the right move for you will depend on how close you are to retirement and your appetite for risk, among other things.
Any time you’re trying to decide if you should pay down debt or boost your savings, you’ll have to calculate how much interest you stand to lose or gain.
Over payments on your mortgage can significantly reduce the amount of interest you shell out over the duration of the loan. Is this figure more than you would earn in compound interest and investment returns after making additional super contributions?
We have various financial and superannuation tools to help you work out the finer details, but you may also want to consider psychological factors. Some people feel far more relaxed when they have no debt hanging over them.
Choosing between boosting your super and paying off your home is often a difficult decision.
You can make retirement contributions from your pre-tax dollars through salary sacrifice arrangements with an employer.
Salary sacrifice contributions are levied at 15 per cent, which means you will pay less tax overall if your marginal tax rate is above this figure.
Seek superannuation advice from a financial adviser to learn more about how this works in detail, but the higher your marginal tax rate, the more your retirement savings could benefit from salary sacrifice deals.
Making additional payments on your mortgage doesn’t have quite the same benefits, as the money comes from your after-tax salary. However, you still enjoy some advantages. For example, main residence exemption rules mean you don’t have to pay capital gains tax on the profits from a house sale if you live at the property.
You can only pay so much into your super each year before the taxman starts getting a bigger slice of your contributions. New government rules introduced on July 1 this year mean the concessional contribution cap is $25,000 for 2017-18, while the non-concessional cap is $100,000. Click here for more information on recent super reforms.
— ASFA (@asfaAUST) July 14, 2017
Prefer to pay off your mortgage? You may still suffer payment restrictions. Many mortgage providers charge fees for over payments, or limit the amount you’re allowed to whittle down your loan each year.
Choosing between boosting your super and reducing an outstanding home loan isn’t a simple decision – and it’s one you may not want to make on your own.
Calculating interest rates, tax benefits, concession caps and various other financial planning riddles is a complex task that often benefits from the help of a professional.
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