To pay off the mortgage or super top-up? There is no single answer, but these four questions can help you decide


At some point in life, many people wonder which is better: to pay off the mortgage as quickly as possible or to supplement your retirement pension?

If your emergency cash reserve looks fine and you have enough to cover yourself for about three to six months if you lose your job, the super mortgage loan question is a good one to ponder. There is no one answer.

At first glance, there are compelling arguments for building your super; you can enjoy compound interest magic (and, potentially, some tax breaks thus) – while being low, the interest rates on mortgages.

If you get 8 percent compound interest on super and by paying only 3 percent of your mortgage, earning a super can seem like a good option.

But financial decisions are as much about psychology as they are numbers. It all depends on your debt comfort zone.

It is better to seek professional help Financial Advisor or advise – but here are a few questions to consider along the way.

1. Am I “on track” to have enough Supers in retirement?

Use government Moneysmart retirement planners or your super fund calculator to check.

If it seems sparse – perhaps due to career breaks or a part-time job – you might consider wage sacrifice extra in your super (in addition to what your employer already puts there).

For example, an extra $ 50 a week, even for just a few years, can help you remedy your meager super projections.

According to Smart money:

“The payments, called advantageous contributions, are taxed at 15%. For most people, this rate will be lower than their marginal tax rate. You benefit because you pay less tax while increasing your retirement savings. […] The combined total of your employer’s concessional sacrifices and salary must not exceed $ 27,500 per fiscal year. “

Try it Industry super Where Smart money calculators to see how much more you would have in retirement if you sacrificed your super pay for a few years. Consider asking your super fund for advice on your super investment options and age pension rights.

You might also consider an after-tax deduction great personal contribution (i.e. put extra money from your savings or take home pay into super). Contributions can be tax deductible, but even if it doesn’t, super returns are tax-efficient.

Are you “on track” to having enough Super in retirement? Use online calculators to find out.(Unsplash: Joshua Mayo)

2. And the pension?

Are you expecting a full age pension? To find out if you are likely to benefit, use a online calculator or ask your super fund. People with “too many super” do not receive a pension (although most retirees receive a partial pension). For some, the more you put super, the more the less you get in age pension payments.

For single owners, the total asset threshold for a full age pension is $ 270,500 (including the super but excluding your primary residence), while the age pension threshold partial is $ 593,000. For couple owners, the combined total asset threshold for a part-age pension is $ 891,500 (also including super but excluding primary residence).

If you have a median income and your super balance should be between the lower and upper asset thresholds of the pension, some models predict that for every additional $ 1,000 put into super at age 40, you would only earn about $ 25 a year in terms of retirement income (due to the decrease in pension income of eligible age).

For those with low incomes, additional super contributions may not be the answer at all if the result is more financial stress in your working life and an immediate risk to home security.

3. If I retired with a mortgage, would I be able to get by?

Many people end up retiring earlier than expected, due to health issues or other issues.

If you were still paying off your mortgage in retirement, would you be comfortable with that? Or would that be a source of concern?

Traditionally, most people retire after paying off their mortgage, but now others are approaching retirement with a remaining mortgage. It might not be the end of the world if you had $ 100,000 left on the mortgage when you stop working. After all, you can shoot up $ 215,000 of your super tax-free retirement to pay off the debt. It may also increase your age pension entitlement (because your primary residence is exempt from the pension credit tests while the super is not).

An older couple sits on a bench overlooking the water, with their backs to the camera.
If you and your partner retired with mortgage debt, would you be okay or would that be a cause for concern?(Unsplash: Matthew Bennett)

The accumulation of wealth in the retirement pension will exceed the interest on a mortgage in most cases for a period of time, even after you retire. Even so, you might think it’s worth it to wipe out the last vestiges of your debt in retirement so that you can stop worrying about it.

4. Will the choices I make today cost me later – and am I okay with that?

Australian property values ​​have skyrocketed and many have borrowed more to pay for renovations. The full “cost” of a renovation may not be apparent at first.

The actual cost of a $ 150,000 renovation over the next 20 years could be more like $ 700,000. How? ‘Or’ What? Well, if that $ 150,000 were put into a super balanced allocation for a few decades, it would probably be around $ 700,000. It’s compound interest for you. You hope to get that in capital gains from the renovation.

But it’s never just about finances. The extra mortgage might be worth it, as it paid off for a home that brings comfort and joy (as well as the capital gains).

Likewise, paying off your mortgage as soon as possible could mean giving up the extra you’d get if you put it on super. But for some, canceling a mortgage will be worth it to be debt free. Maybe after the mortgage ends, you can maximize the super salary sacrifice until retirement, while lowering your tax bill.

At least do the math

There is always more than one solution. To know what is right for you, you will need advice tailored to your personal situation.

But it’s good to watch where your super is now and where he’s heading, and calculate your debt ratio (debt divided by income). It is often used to assess the seriousness (or not) of your debt. Lenders and regulators could consider a debt-to-income ratio greater than six times your income to be “high”, but your personal debt comfort zone could be much lower.

Emotions play a bigger role in financial planning than many would like to admit. The desire to pay off a mortgage quickly can be influenced by how you were brought up, the feelings of anxiety and stigma that often accompany debt, and Australia’s cultural bias in favor of home accession. debt free property.

Depending on the circumstances, it may be time to rethink the bias of paying home debt versus accumulating super wealth. At least do the math so you can make an informed choice.

Di Johnson is Senior Lecturer in Finance at Griffith University. This piece first appeared on The conversation.


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