Super v Mortgage? Where should you put surplus cash?

The last 18 months have highlighted the importance of future-proofing your financial security. But if you’re lucky enough to have a little cash left in the bank at the end of each month, working out the best place to put it can be confusing.

Aside from depositing it into a savings account, most of us will choose to pay down our home loan or top up our superannuation.

So, which is the better option? Well, the short answer is… it depends. There’s no one-size-fits-all answer to this question. Both options have their pros and cons, and a lot depends on your personal situation. Here are some of the things to consider when weighing up where to put your extra cash.

Paying extra into your mortgage

Pros

• By making extra repayments on your home loan, you could potentially save tens of thousands in interest and also pay off your mortgage much faster.[1]
• You may still be able to access your money if your home loan has a redraw facility or an offset account attached to it. If you are using redraw, make sure you find out from your lender if any fees apply and if there is a minimum or maximum amount you can redraw. It’s also worth noting that if your financial circumstances change, your bank can amend or terminate your redraw.

Cons

• Unlike super, there are generally no tax perks that come with adding money into your mortgage.

Paying extra into your super

Pros

• Making extra contributions into your super will mean you’ll have more money at retirement.
• Plus, there may be tax advantages that come with making additional contributions to your super. For example, any before-tax money that you put into super is taxed at 15% (as opposed to whatever your marginal tax rate is). You may also be able to claim a tax deduction if you make an after-tax contribution.[2]

Cons

• You generally won’t be able to access your money until you meet a condition of release like reaching your preservation age and/or retiring. You also never know when the rules around super may change. So this may be different in the future.

Factors to consider

There are a number of other factors to think about when you are trying to figure out what is the best option for you. Here are some of the issues to consider.

Age

Paying off your mortgage in earlier years may allow you to make extra super contributions later with surplus cash flow when mortgage payments are reduced, and your income may have increased.

If you’re in your twenties or thirties, you won’t be able to access your super fund for another 30+ years. So, at this time of your life, when you’re more likely to have other expenditure needs, you may not want money tied up in super. Instead, paying down your mortgage and deriving that as a benefit now, rather than waiting for your super fund to deliver in the far-distant future, may well be more attractive. But if you are older, you may be in a better financial position to use any surplus cash you have at hand to top up super before retirement.

How much you have already paid off your loan

When you first take out a loan, interest accounts for a larger proportion of your repayment than principal. So, the more you pay off earlier, the less interest you’ll pay over the long term. For this reason, it be worth focusing on reducing your mortgage in the first few years before considering any other strategies with your money.

Accessing funds

Super funds are generally not accessible until you meet certain conditions (i.e. until you retire), while mortgages offer greater flexibility if you need to access funds. So, if you think you are going to require money before then, for things like holidays, school fees, in the case of emergency etc, paying off a mortgage may be a better option, especially if there’s a redraw facility, offset account or access to equity in your property.

Interest Rates

Right now, when rates are low, adding money to super can be more beneficial than it would be when rates are higher, because the return you’re likely to get on your super will probably be higher than the interest you’re paying on your mortgage. Currently the rate on your home loan will likely be  about 3.5% or less (depending on whether you have previously fixed your home loan and other factors). With the reduced interest rate cost, the ‘hurdle rate’ of investing on an after-tax basis has also been lowered. This makes superannuation a more attractive option for consideration, because over the long term there’s a good chance your superannuation will achieve a rate of return, after tax, of greater than 3.5%. So, if you’re looking for long term gains, and haven’t maximised your annual concessional contributions, topping up your superannuation may well net you more money in the long run.

However, you also need to think about your appetite for risk and your willingness to invest extra funds into growth-based assets. While there’s more risk associated in stocks and shares and other equities, which is where most super funds invest your money, over the long term this can deliver a better return on investment than paying off your home loan. On the other hand, if you're more risk averse, contributing to your mortgage guarantees a return regardless of market conditions, since your home loan is being reduced and you’re paying less interest on the amount owing over time.

Simplicity & Flexibility

Working out what is the easiest option for you also comes in to play. For most people, making additional mortgage payments is a simple and straightforward process, while making additional regular payments to your superannuation may require contacting the HR department of your company, and your tax accountant, to ensure you don’t exceed the concessional cap on superannuation contributions.

So where does that leave you?

In summary, making additional repayments on your mortgage gives you the flexibility to use it for a rainy day or any investment opportunity. On the other hand, superannuation allows you to minimise your marginal tax rate and the returns on realisation are likely to be greater, but available investment options in the interim are limited.

Ultimately, however, whether you like the idea of owning your home outright before you move on to other investments, or you’d prefer to lock your money away, whichever option you take is going to depend on your personal goals, your current financial position and whatever makes you feel most comfortable.

No personal advice

The information provided in this document is intended for general information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchasers of superannuation or borrowers seeking to enter into loans or repay debt.  The information does not take into account your personal financial circumstances. You should seek professional financial, accounting and taxation advice before deciding to proceed with any strategy.