Mortgage versus super

You could make a big difference to your mortgage – by putting more money into your super.

If you have any spare cash, your first reaction may be to pay it off your mortgage. But is this strategy always the right strategy?

It’s worth thinking about putting any extra cash you might have into your super, then using your tax-free super* to clear your mortgage once you’ve turned 60.

Let’s say you’re 41 years old, with a mortgage of $300,000 over 25 years at an eight % interest rate, and want to pay your mortgage off within 19 years – by the time you’re 60. If you have spare cash of, say, $3,138 per year, your instinct might be to pay this amount off your mortgage.

But, if you salary sacrifice $5,364 (the pre-tax equivalent of $3,138 on a marginal tax rate of 41.5%) into super, you could be looking at an extra $198,344** in super by the time you turn 60, and only $130,070 remaining on your mortgage.

If you retire at 60, your entire super benefit will be tax-free, including the extra $198,344 you’ve contributed. You could use $130,070 of that to clear your mortgage and have an extra $68,273 to spend in retirement.

Whether you’re close to retirement or it’s still a few years away, you might even want to think about restructuring your mortgage (extending the term or changing to an interest-only loan) so you have extra cash to put into your super.

Of course, this strategy means you have to be happy holding debt, in the form of your mortgage, for longer than you might otherwise have planned to.

You also need to be comfortable with some of your 'spare cash' being locked away in super rather than as equity in your home, which you could access if you needed it.

Also, super investments may go up or down over time, which is particularly important if you plan to use your super benefit to clear your mortgage when you retire. That’s why it’s best to seek advice on whether this is a good strategy for you.

 

*This applies to super benefits taken from a taxed super fund.
** This assumes a gross income return of 3% per annum (70% franked) and capital growth of 5.5%. No fees or charges are considered.



To make a difference to your super, contact a financial planner accredited by AMP.
AMP # 1 for super is based on assets under management (Plan for Life March 07 and DEXX&R March 2007). Find out more about why AMP for super.


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