Home Loan versus contributing to Super – a common question

It’s one of the most common questions we get. Are you better off putting extra money into superannuation or the home loan? Which strategy will leave you better off over time? In the super versus home loan debate, no two people will get the same answer – but there are some rules of thumb you can follow to work out what’s right for you.

Conventional wisdom used to dictate paying off the home loan first and once debt free turning your attention to building up your retirement savings in super. But with interest rates at record lows and many super funds potentially offering a higher rate of return, what’s the right strategy in the current market? Just remember while 2019 was a very good year, investment markets do go up and down and without a crystal ball, it’s impossible to accurately predict how much money you will earn on your investment.

So, with all that in mind, how does it stack up against paying off your home loan? There are a couple of things you need to weigh up. They include:

• Each dollar going into the mortgage is made from ‘after-tax’ dollars. Paying off your home loan provides a risk-free return and you need to gross it up for tax to get a true comparison i.e. a home loan rate of 3.5% is actually a real return of 5.74% for a 39% marginal tax rate earner.
• Contributions into super can be made in ‘pre-tax’ dollars. For the majority of Australians contributing into super will reduce their overall income tax position and boost your savings – remembering that pre-tax contributions are capped at $25,000 annually and are taxed at 15% by the government (30% if you earn over $250,000) when they enter the super fund. Is the income tax saving more than the interest saved on the home loan?
• Consider the size of your loan and how long you have left to pay it off. A dollar saved into your home loan right at the beginning of a 30-year loan will have a much greater impact than a dollar saved right at the end. 
• If you have an offset or redraw facility attached to your home loan you can also access extra savings if you need them. This is different to super where you can’t touch it until preservation age (currently 58 and increasing to 60) and certain conditions of release are met. You could also keep excess funds in an offset account and make a super contribution just before the end of financial year.
• Don’t discount the ‘emotional’ aspect as well. Many individuals may prefer paying off their home sooner rather than later and welcome the peace of mind that comes with owning their own home. Only then will they feel comfortable in adding to their super.

Before making a decision, it’s also important to weigh up your stage in life, particularly your age and your appetite for risk. Whatever strategy you choose you will need to regularly review your options if you are making regular voluntary super contributions or extra home loan repayments. As bank interest rates move and markets fluctuate, the strategy you choose today may be different from the one that is right for you in the future.

Please do not hesitate to contact us if you have any questions.

Kind regards,

The Coastline Private Wealth Team.