Should I Reduce My Mortgage or Increase My Super?
Well done if you’re thinking of making additional contributions to your superannuation fund! You’re well on your way to making thoughtful decisions that you’ll later appreciate whilst enjoying your retirement.
However, today’s economic climate and booming housing market means that a lot of people are also carrying large mortgages. So, what do you do? Pay more off your mortgage or make extra super contributions? Although it’s a challenging decision, it’s good that you have the surplus cash flow to make this choice.
On one hand, you think you should contribute as much as possible to your super since, thanks to compound interest, even a little can go a long way. However, paying off your mortgage feels like an enormous and long-term goal that can ultimately save you interest expenses.
So, how do you choose? Let’s start by looking at each strategy’s benefits…
Why Is It Important To Pay Off Your Mortgage Quickly?
If you own one, your home is probably your most expensive asset. Once you pay off the loan, you’ll feel a fantastic sense of relaxation. If you have one less monthly payment to worry about, it opens up many choices of how to spend or save this money.
As at May 2022, the average new loan in Australia for people buying an existing property was $630,662.1
If you are in a position where you have additional cash flow, applying your spare cash to your mortgage may be sensible.
Another incentive would be that you’ll pay less for your home overall if you pay off or reduce your mortgage sooner.
When you take out a mortgage, you actually pay more than you did when you purchased the home because of interest. In essence, you are paying for the opportunity to be approved for such a large loan, and the time it will take you to pay back the debt.
You would need to borrow $400,000 from the bank if you put down $100,000 toward a $500,000 house’s purchase price. Let’s say the bank gives you a loan with a 3.5 per cent interest rate. The total amount of your payments will greatly affect how long it takes you to repay the loan.
For instance, the total cost of your loan will be $514,715 if you pay off the mortgage in 15 years with a $2,860 monthly payment.
- If you make $2,320 in monthly mortgage payments for 20 years, your loan will have a $556,761 total cost.
- Your total loan balance will be $646,624 if you pay off your mortgage in 30 years at a $1,796 monthly payment.
In the scenario above, paying off your loan in 15 years instead of 20 would result in a $42,046 savings. You may use the money you save by paying off your mortgage early to fund your retirement, among other things.
Why Increase Your Superannuation Contributions?
It’s a good idea always to have a strategy to help build your nest egg and prepare for your retirement whether you be 30, 40, 50 or 60 years old. Sacrificing some of your current cash flow to better your financial future by increasing your super contribution amount can be a wise choice.
A Finder survey in June 2022 found 14% of superannuation holders make monthly contributions to their superannuation fund, and an additional 20% have made one-off contributions. Another 21% say they are planning to make additional contributions to their fund at some point in the future.2
Compound Interest
The money you contriute into your super account accrues interest. As time goes on and your fund grows, interest begins to accrue on the money you make from interest, and so on. Money grows in value, and expansion fosters expansion. This is referred to as compound interest.
Let’s imagine you have $10,000 in your super and make monthly contributions of $100 to put this in context. If your super is compounded monthly at a rate of 4.25 per cent, it will reach $27,967 in ten years. $55,429 in 20 years; $161,556 over 40 years.
Compound interest makes it possible to earn money without exerting more effort. Planning and starting early will help you have the retirement of your dreams.
Tax Benefits
We’ve already spoken about how raising your super can help you become wealthier; let’s now talk about how it can also help you pay less in taxes.
You can improve your retirement savings through salary sacrificing some of your gross income as superannuation contributions. Once it is in your super, contributions are taxed at a rate of 15% and the remainder of the pre-tax income is taxed at your higher marginal tax rate.
Reduce My Mortgage or Increase My Super: Which is Which?
Fortunately, if you are forced to pick between paying more toward your mortgage or your retirement account, both options will help you expand your wealth and make plans for the future.
Furthermore, you don’t necessarily need to pick one option over the other. You may be able to devise a strategy where you can have you cake and eat it too!
Our expert financial advice team at Central Coast Financial Planning Group can assist you in choosing the best option for surplus cashflow allocation, achieving your goals and improving your current financial situation.
Call us or book online to secure your first meeting with our advice team today!
REFERENCES:
- https://www.canstar.com.au/home-loans/average-home-loan-australia/
- https://www.finder.com.au/superannuation-statistics
DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.
