Super or Mortgage

Super or Mortgage: How do you choose?

The pandemic gave a lot of us the perfect excuse to finally review our finances. For a lot of us, it might be the first time we’ve seriously weighed up what’s best for the future.. With so many changes and so much uncertainty on the horizon, more of us are looking to get the most out of what we have, especially our money. But with interest rates so low, and superannuation returns so high, are we better off to clear our mortgages or put the money away for retirement?

Which is the best option? And does it matter? Will it change in the future. The answer for this question, like all other questions, is ‘it depends’.

What does it depend on? Let’s go through some things to consider.

Disclaimer: We don’t know your particular circumstances, so this isn’t financial advice. Everyone’s situation is different and you may have individual circumstances that mean this advice doesn’t suit you.

Comparative growth

This is about comparative growth, but it’s really about the rate of change, and the rate of change over a few different factors. These two factors are the debt growth in your mortgage and the profit growth in your superannuation.

When mortgages are new, the majority of the money that you pay in your repayments will be going to cover interest, and only a little amount will be paying off the principle loan amount. Extra money in at this point in time can make a big difference to the length of your loan.

However, that doesn’t mean that your repayments will decrease, and depending on how much you want to put in, it might only shave a few months off the end of your mortgage. If you’re looking for shorter term gain, your superannuation fund may give better returns. Over the last few years, for example, superannuation funds returned huge amounts as interest rates were dropping. In this case, you would have been better off refinancing your loan and moving the extra as a voluntary contribution to your superannuation. That would have given you the best return on your dollar (although it wouldn’t have saved you anything).

However, before you go squirreling all of your money into super, there are some other things to think about.

What you need to know about superannuation

Voluntary super contributions almost seem too good to be true. They reduce your tax liability and often attract gains that are well above current market rates. Governments will also often match after-tax donations up to a certain amount (they may only offer 50 cents for every dollar you contribute, but still!). The pandemic period gave massive returns for a lot of super investments as well.

And although this article is for homeowners, for those of you waiting to get a foot on the property ladder, there’s something for you. Many states have schemes where you can redraw on voluntary super contributions to use as a deposit. The rules are quite particular about amounts, but it can be a good way to reduce your tax liability and make it a little easier to get a house in the future.

However, the most important thing to remember about superannuation is that you cannot access it until you reach retirement age. There are some circumstances where you may be able to access it sooner, but generally it’s not until you’re retiring. This means that if you’re younger, it will take you longer to access the money you’ve contributed to your super. The closer you are to retirement, the more obvious contributing to super becomes. For people who have decades of working left, however, it becomes less obvious.

Paying off your mortgage sooner

Your house is one of the largest assets you’ll ever own, and there are some benefits to building equity in that. It provides you with security for future loans, whether they’re for more properties, a that once-in-a-lifetime trip or a new car. The fact is that having a house in your back pocket makes borrowing much easier. While money in super is likely to increase in value more than your property will, there’s something to be said for having access to a secured loan (that is, a loan secured by an asset, such as your house). No one will let you borrow off the basis of your superannuation balance, so if you like a little flexibility in your finances, the mortgage might be the better option.

There are obvious benefits to paying off your mortgage sooner as well as contributing to your superannuation. No matter which you choose, you’ll be setting yourself up better for the future. Which is ‘best’ for you will depend entirely on your situation, what’s likely to change in your life, and how soon you might be able to access your superannuation funds.

Hopefully this has helped you understand the options available to you when it comes to choosing between your mortgage and your superannuation. As you can see, there’s no easy answer, but no that no matter what you choose, you’ll be making life in the future a little easier for yourself. Regardless of whether you pay your house off faster, or take advantage of the benefits of voluntary super contributions, you’ll be in a better position long-term.

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