Super contributions versus mortgage paydown.
If you have some extra cash, you might be deciding whether to make a concessional contribution to your super fund or use it to pay down your mortgage — whether on your home or holiday house. Both strategies have advantages, but the right choice depends on your personal situation.
Let’s take a closer look at the options.
Option 1: Pay Down Your Mortgage
Putting extra money towards your mortgage helps reduce non-deductible debt — i.e., debt that carries interest but isn’t tax-deductible. This strategy can be particularly appealing if you value certainty or want to free up cash flow soon.
Advantages
- Guaranteed savings: Every extra dollar paid directly reduces your interest costs. For example, on a 5% loan, an additional $10,000 payment saves you $500 a year. This is essentially a risk-free 5% return.
- Increased equity: Reducing your loan balance builds equity in your property, which can improve your financial flexibility if you need to borrow against it or decide to sell.
- Improved cash flow and peace of mind: With a smaller loan, your minimum repayments shrink, giving you more breathing room and financial security.
Downside
Unlike super contributions, there are no immediate tax benefits. Over the long term, investment returns from a well-diversified super portfolio often exceed typical mortgage interest rates.
Option 2: Concessional Super Contributions
Concessional super contributions, like salary sacrifice or personal deductible contributions, boost retirement savings and cut personal tax. They’re especially appealing for people nearing retirement. Super may be partly or fully accessible after age 60, at which point withdrawals are generally tax-free and can be used to repay loans — while also having enjoyed a tax break on contributions.
Advantages
- Tax benefits: Contributions are taxed at 15% in super (or 30% for some high-income earners), which is often well below your marginal tax rate.
- Long-term growth: Super investments in growth assets, combined with a concessional tax rate of 15% on asset income in super, can significantly grow your retirement savings.
Downside
Funds are locked away until age 60 and are generally unavailable for emergencies. Market fluctuations, such as those seen recently, may also impact your superannuation savings.
Case Study – Brian
Brian has $10,000 (after tax) of surplus cash flow each year. He is considering using this surplus to either:
- Pay down his mortgage on a holiday home, or
- Make a personal deductible contribution to super.
Brian is 55, plans to retire at 60, and is on the 39% tax bracket (including Medicare Levy). His mortgage interest rate is 5.6%.
Option 1: Pay Down Mortgage
If Brian makes an additional $10,000 mortgage repayment each year for the next five years, he will have approximately $56,000 less debt than he would otherwise have. This figure includes the interest savings over that period.
Option 2: Make Concessional Super Contribution
If Brian forgoes $10,000 of after-tax income, he could make a deductible super contribution of approximately $16,390 (because 39% of $16,390 is $6,390, leaving $10,000 out-of-pocket).
A net amount of $13,930 ($16,390 less 15% contributions tax) is then invested into his super each year for five years.
Assuming his super grows at 5.6% net per annum, he would have approximately $78,000 more in super than he would have had without these contributions.
At age 60, if Brian is retired, he can withdraw from his super tax-free to help pay down any remaining debt.
The Verdict
There’s no one-size-fits-all answer.
- Paying down your mortgage offers security and peace of mind.
- Making extra concessional super contributions can deliver powerful tax benefits and long-term retirement growth.
More information
Chat with us to find out which option suits you best. Whether you’re focused on financial flexibility now or building wealth for later, we’re here to help you weigh the pros and cons and make the most of your money.
Based in Noosa, on the Sunshine Coast Queensland, we work with clients throughout Australia.