Mortgage v Superannuation

Deciding whether you should prioritise paying off your mortgage or boost your superannuation balance is an important decision and there are many factors that should be taken into consideration.

The first thing that you should think about is how likely it is that you will want to access the money before your retirement.

If you have funneled your extra cash into additional mortgage payments, then you will usually be able to redraw in case of an emergency or if you wish to restructure your finances (such as for purchasing an investment property).  On the other hand, if you have chosen to direct the extra money into your superannuation, you will have to wait until you reach preservation age before you can access it.

If you make extra concessional superannuation contributions by salary sacrificing, there can be some significant tax breaks. Currently, you can make concessional superannuation contributions of up to $35,000 (or $30,000 if under 50 years of age) that, for most people, are taxed at the low rate of 15%.  Note this is proposed to reduce to $25,000 for all ages from 1 July 2017.

The potential advantage of making extra concessional superannuation contributions over the years is that you can repeatedly capitalise on the low tax rate.  Alternatively, if you wait until you have paid off your mortgage before you start salary sacrificing, you may have limited time in which you can use the concessional contribution tax breaks.

Some individuals who choose to salary sacrifice into concessional super contributions at the expense of paying off their mortgage as fast as possible plan on using the balance of their superannuation to pay off the remainder of their mortgage once they have reached their preservation age.

While this can be a great tax minimisation strategy, there are a couple of risks you should be aware of.  There may be a change to the way superannuation is taxed, meaning that you could be disadvantaged.  Another possibility is that there will be a market downturn when you plan on withdrawing your super, meaning that the balance may not be as high as you had initially anticipated.