Mortgage or superannuation: Which should you prioritise?

If there has been one silver lining to come out of the COVID pandemic and the ensuing lockdowns, it has been that the lack of holidays and inability to go out has driven down most entertainment expenses.

So, what should you do with the extra money you are saving? Are you better off paying off your mortgage or putting it into your superannuation?

This question has slightly different answers based on your financial situation and your stage in life, so if you want specific advice on what it means for you, it is important to put this question to a registered financial adviser.

Read: Advice could drive a better retirement

However, there are advantages and disadvantages behind both strategies, and the situation also changes based on the current economic situation as well.

While interest rates continue to be ridiculously low, however, this one does have a relatively straightforward answer, and that is that it makes most financial sense to put the money into super.

Assuming that you are still on track to pay off your mortgage before you reach retirement age, you will earn more money and enjoy more tax benefits by investing the money in your retirement than in your house.

Read: Plea to change ‘lost’ super laws

Finance expert Paul Clitheroe crunched some numbers for and found that investing an extra $50 into super each week would leave you a long way ahead over the mortgage option.

“Assume you have a $500,000 home loan with a 25-year term, and an interest rate of 3 per cent,” he explained.

“Over the full term you’ll pay about $211,000 in total interest. By paying off an extra $50 each week, or $200 monthly, you could be mortgage free almost three years ahead of schedule and save $25,600 in interest.

Read: Super changes will help wealthy tax dodgers

“Or, you could tip that $50 into super each week. If you’re aged, say, 40, with a ‘balanced’ super fund, making before-tax weekly super contributions of $50 can mean having an extra $81,300 in retirement savings by age 67.”

While the maths is usually quite simple in these situations, they don’t take into account the relief that comes with owing less debt.

Other emotional factors include not having access to money that is stored away in superannuation, which is obviously more of a factor for younger generations.

It is also important to consider the size of your mortgage and how long you have left to pay it off.

One of the crucial factors of a healthy and successful retirement is to make sure you are mortgage free.

The Treasury’s Retirement Income Review of 2020 noted that homeownership and home equity was crucial to a comfortable retirement, and also that the home was the most important component of voluntary savings.

“Homeowners have lower housing costs and an asset that can be drawn on in retirement,” the review found.

“The system favours homeowners, such as through the exemption of the principal residence from the Age Pension assets test.”

The report also found that having a home opened the door to using it to access equity if needed in retirement.

“Homeowners also have the opportunity to access the equity in their home to supplement retirement income and manage longevity risk, although few currently do so,” the report revealed.

“On average, equity in the family home represents the largest share of net wealth for Australians aged 65 and over.

“Available home equity can double the amount of their superannuation and help fund their retirement. Accessing home equity can offer a responsible, long-term solution to allow current retirees to boost their retirement funding.”

If you are not on track to pay off your mortgage before you retire, you may want to put that extra money into your super, otherwise super is probably the decision that makes the most financial sense.

As mentioned at the start of the article, a conversation with a financial adviser is probably the best way to go when considering these options.

Have you found you have had extra money available during the pandemic? Have you decided what to do with the extra money? Why not share your thoughts in the comments section below?

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Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a Centrelink Financial Information Services officer, financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

Ben Hocking
Ben Hocking
Ben Hocking is a skilled writer and editor with interests and expertise in politics, government, Centrelink, finance, health, retirement income, superannuation, Wordle and sports.
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