Welcome to The Ultimate Guide To Paying Off Your Mortgage vs Topping Up Your Super.
While we aim to provide you exceptional value and insights into your financial affairs, we also want to make it explicitly clear that the content in this guide is not financial advice and is general in nature.
If you're seeking financial advice for your mortgage or super, we encourage you to chat with a financial adviser.
This guide was written for those in their 40’s and 50’s, living in and around Perth, who want to get some of their biggest ducks in a row before retirement.
It’s for those who feel like they’ve worked hard their entire life; those that have been committed to creating the best life possible for themselves and their families.
Over the years you might have worked hard by working your way into a respectable position or maybe you’ve started a business along the way.
You’ve most likely raised a family at this stage and perhaps they’re starting to fly the nest…
At this stage of your life you may find more space in your home as the kids spend time elsewhere; with partners, friends or uni/work commitments.
Whatever your circumstances, you’ve finally had the time to start thinking about yourself (for once) and the important life events which are coming up.
The Event of the Half Century… Retirement
While this is not a comprehensive guide about retirement planning, it might give you some pretty good ideas on where to start, especially when it comes to your mortgage or superannuation.
Now that you’re closer to retirement than you were in your 20’s, and your 30’s, it’s time to start making a plan and finding out what sorts of shortcuts you could create for yourself in the process.
Of course, one of those shortcuts could be finding out whether it’s better for you to pay off your mortgage first or put money into your superannuation.
At this stage, which one do you think it is for you?
Before we start, we’d first like to congratulate you on wanting to take control of your future.
Not everyone has the guts to face the future and understand their financial trajectory - especially when it comes to mortgage or super.
A lot of people arrive in their 40’s and 50’s and continue to bury their heads in the sand and avoid thinking about the future at all costs.
Some people can even forget to breathe when they start thinking about it – it stresses them out that much!
Our commitment to you is that we’ll make it easy for you to understand and avoid overwhelming you with jargon or complexity at all costs.
To be able to do so, we also require something from you...
If you have any questions that remain unanswered after reading this guide, please, please, please, let us know!
We’d hate to leave you wondering.
Whether it’s in the guide or not, we want to be able to support any questions you might have around mortgage vs super, retirement or any other financial concerns that are playing on your mind.
That’s all we ask :)
At the end of the day, this guide hopes to ease some of your concerns about whether or not you’re on track to making the right decisions to live a comfortable and fulfilling retirement.
Disclaimer: The information contained in this guide is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Financial Framework Pty Ltd t/as Financial Framework ACN 168 811 425 is a Corporate Authorised Representative of Synchron AFS Licence No 243313
First of all, most people like to know how they stack up against their peers.
Are you on track to enjoy the same sort of retirement as everyone else around your age, lifestyle, location?
It's a valid question. So that's where we'll kick off the Mortgage vs Super argument.
There are a number of factors that influence our financial decisions leading into retirement; income, the value of our home, how much we have saved in super, our lifestyle, health requirements; the list goes on.
You’ve heard the saying: “It’s not where you start, it’s where you finish.”
While it’s rarely ever about what you have to begin with, but more about what you have to finish (especially when it comes to retirement), it’s important to know how you compare right now.
When you know where you sit it can give you an idea on whether you’re going to be able to enjoy the same level of retirement as your peers.
It might not be important for everyone, but the last thing you want is to feel like you’re missing out in the last 20 – 30 years of your life.
Retirement should be a time when you can live it up!
If it doesn’t look like that now, you’ve still got time to make up for it and this guide will provide some general ideas that might help you do so.
Please note: We don’t mean to alarm anyone by these numbers. The information you’re about to read is from the entire working population across Australia and is an average only.
As you could probably appreciate, some people earn higher incomes than others.
Sometimes it’s a life-style choice and sometimes ‘your ambition has led you to study hard, work hard and be financially rewarded for your efforts’ As a country, Australia does okay.
Wherever you sit on this scale, you’re in a great position to be thinking about your superannuation and mortgage.
We say it all the time at Financial Framework, if you’re between the age of 45-54 you’ve reached one of the most prosperous times of your life! You should be celebrating this exciting time of your life.
You’re essentially like a farmer ready to harvest their crop; a crop that had an absolute golden season of rain and sunshine. Need we say more?
The Australian Bureau of Statistics has found that between 45-54, it’s likely that you’re earning anywhere from $1,085 for females and $1,721 for males per week (on average).
Side note: Perth has, in the past, had exceptionally good conditions to earn an income, we predict that this number could actually be slightly higher for Perth.
To understand exactly where you sit, check out the ABC’s income distribution calculator. It’s an amazing tool.
When you set all of these statistics aside, the moral of the story is:
It’s a truly magnificent time of your life to be doing everything you ever wanted, because most things we tend to enjoy require just a little bit of money...
Before you go out and spend it all though, it’s important to understand the power of your money for your future.
Fun Fact (even more so if you’re a golfer). Did you know if you had 10 cents and you doubled that 10 cents every year for 18 years (or holes) you would have $13,107.20 at the end?
It’s a phenomenal way to think about your money right?
Imagine finishing 18 holes and going from 10 cents to $13,000!
(We’ve included a section about compound interest in the Bonus Education section at the end of the ebook. Download your copy at the beginning of this article)
Outside of income, most people own a home or are working towards paying one off. That’s why you’re here, right? However, unlike our incomes, something that seems to be almost totally out of anybody’s control is house prices.
The average person has most of their wealth tied up in their home. So let’s see how you compare and how this plays out for your retirement.
Just like incomes, house prices can vary dramatically.
We’ve all heard of the 1 bedroom apartments being sold in Sydney for more than $1 million (or at least they were) and the beachside mansions that exist along our inner city coastlines asking for up to 8 figure sums ($10 million+).
While there’s the extremely high prices, we can’t forget about those living in the country in humble 4-bedroom homes that only cost them a few hundred thousand.
So what’s average when it comes to housing in Australia?
According to the property experts at Domain, Australia’s median house price at this time of writing is around $809,201.
While it’s said that we are the golden state, the lucky state where wealth boomed during 2000 to 2012, our property prices are still quite humble compared to other parts of Australia. Especially when we look back on the last few years of our market.
House prices in Perth have were declining for over 6 years and are down by more than 17.8 % (at the beginning of 2020) since their peak in June 2014.
Perth’s Median house price is around $500,000 at the time of writing. That’s obviously less than what it has been, but what does that matter?
Well, according to Domain, average household wealth across Australia exploded from 2005 to 2015 by $600,000 per household. In full disclosure, to achieve this explosion, your home or assets would have likely been in excess of this value as a starting point and also location, location, location… plays a part.
So, while Perth has experienced some significant boom times during those years, it may not have received all of the $600,000 average benefit over the most recent boom.
Why is that you ask?
You very well might have experienced that.
However, if you take into account that median house prices are $500,000 in Perth compared to $809,201 across the nation, it wouldn’t have been normal to have that experience.
Why does all of this matter? Who cares about average? You’re unique, not average, right?
Well, it’s part of your circumstances, that’s why.
Call it luck or chance. Part of where you are today is as a result of your past experiences.
Before you look forward it can be important to look back on what you have so you know what you might need to change, or keep, to create the future you want.
Is it wise to put your money into your mortgage or super at this stage?
Another thing to consider is whether your home is actually a good place to put your money at all.
When the numbers are negative, does your mortgage really seem like a good place to be putting your money? That’s why it’s important to consider your home in the bigger picture.
It can very much depend on where you choose to live, what your preferences are towards rent vs own and a whole host of things, but we won’t go into that here.
One of your biggest assets is likely your superannuation balance.
Do you know your balance?
If you’re like 90% of people we first meet, you most likely won’t. At least not as close as you might think.
It’s funny. Unlike our bank account, as a society, we don’t pay superannuation the attention that it deserves. Up until Scomo’s Early Super Access of course.
In most cases, your superannuation could be many multiples of your bank account.
If you’re nearing retirement, this is especially the case (for the average person).
If you happen to be working with a financial adviser they could give you a pretty good idea right off the top of their head; whether you have $2,000,000 or $100,000.
We’ve even had clients whose superannuation was ‘lost’ and we found balances of up to $200,000. And these were just everyday people that had forgotten about an old fund.
Superannuation is one of those ‘assets’ that doesn’t mean much to us… until it really matters! And let us tell you, it matters right now!
But you know that…You’re here now. You’re taking the right steps.
You know how important this asset will one day be for you.
Often we can get curious about what others have, or how they got to be where they are, but we don’t often think about super the same way.
We’re about to give you a taste of the average superannuation balance, and… the numbers are…interesting (to say the least).
Just like we said earlier, it’s important to understand your circumstances to determine your future trajectory. So, there’s something we need to tell you before we move on.
If you’re reading this, it’s likely that you live in a very special age group we refer to as Generation X. It has also been called the forgotten generation, the sandwich generation and the MTV generation (we like MTV generation best).
Whereas everyone about 40 years and younger would almost be guaranteed to have had superannuation since they started working, those who are just a teeny bit older are much less likely.
If you’re in your early 50’s you might have worked for 5 or 10 years before the superannuation guarantee was introduced in 1992.
This has translated into generally ‘weak’ superannuation balances for your generation and it’s the reason why many people looking to retire right now are still relying on the age pension.
It just goes to show, the number we generally see the least can sometimes be the number we need to take care of the most!
Superannuation can be really powerful for a few reasons:
While it’s a powerful tool, we can often neglect it. Generally speaking, it has been neglected by most Australians aged over 40 up until now, but it’s not your fault. And you can make a change.
Here are the average superannuation balances for people around your age.
40 to 44 years $99,959
45 to 49 years $145,076
50 to 54 years $172,126
55 to 59 years $237,022
40 to 44 years $61,922
45 to 49 years $87,543
50 to 54 years $99,520
55 to 59 years $123,642
Read the ebook to see how to double your superannuation in 6 years.
You might resemble these balances quite closely or you might not. Whatever you do, please don’t think that these numbers are what you should be aiming towards. They are simply averages.
An age group that we feel is critical to get right is between the age of 50 – 54. At this time, you’ve generally still got around 10 solid working years to make a real impact on your retirement outcome (and income). As you get past this point, making massive change becomes much more difficult.
Here’s what most Gen X’ers think they need to retire…
Can you see the difference in the above balances?
What’s almost unbelievable is that, “projecting the current Association of Superannuation Funds of Australia (ASFA) figures forward to 2043, when many of Gen X will be retired or retiring from the workforce, a comfortable self‐funded retirement is likely to require a savings balance of between $2.09 and $3.98 million”. This is a real statement from a study conducted by Griffith University.
We wish it were different. There are many groups (and popular selling books) out there that will tell you, you don’t need much to retire, “don’t listen to financial adviser’s who’ll tell you that you need $1,000,000 to retire” they say. And that’s fine. You shouldn’t be fearful about retirement or your number, but you must be informed.
What you need to ask yourself is “what do they care?”
Most of the time, these money experts don’t have clients to worry about. What do they care if you don’t have enough in retirement? It means nothing to them, but it means everything to the person who you’re relying on to make your retirement goals come true. They’d prefer you to aim higher rather than lower.
While many people won’t end up with a 7 figure sum in retirement, it’s your advisor's role to help you get as close as possible to a comfortable retirement, whatever that means to you. It could be 6, 7 or 8 figures. It all depends on the lifestyle you want to achieve and what’s possible in your current circumstances.
In Australia, we have a love hate relationship with our income. The more we earn, the more we get taxed. As a hard working group, we don’t like to see our money taken away from us. Of course, if we didn’t pay our fair share of tax we wouldn’t have such an amazing country.
The good news is, your expenses are about to start decreasing after peaking at $2,085 per week (figures based on a couple with kids, youngest aged between 5-14). If you’re somewhere around this category you could now expect to start saving around $95 per week when your youngest is 15 and even more when they start leaving the nest!
With the kids moving out of the equation, you might be thinking, how could we make even more of what we get without a complete overhaul of the tax system?
The good news is you can ‘save’ money on tax and do it legally.
As you’re well aware, our home isn’t a very effective tax haven.
If you’re somewhat of a top income earner this is especially the case, as you’re about to see.
The example below illustrates how superannuation evens the playing field for high and medium income earners.
What is $1,000 earned really worth when you get into higher income brackets?
If you were to simply take home your money, the value of it drops off quite significantly when it enters higher income brackets. If it’s your first $1,000 earned, it’s truly worth that, but when you get to the top income bracket, $1,000 earned is only worth $550 (when you take it home).
Alternatively, to increase the value of your money, you can salary sacrifice into super to make $550 instantly grow into $850.
Home Loan Repayment
*Tax on Super Cont
Net amount to invest in Super or reduce debt
Please note Super contributions tax increases to 30% ($300 in this example) if you earn more than $250,000 per annum.
Tax on this income
0 – $18,200
$18,201 – $37,000
19c for each $1 over $18,200
$37,001 – $90,000
$3,572 plus 32.5c for each $1 over $37,000
$90,001 – $180,000
$20,797 plus 37c for each $1 over $90,000
$180,001 and over
$54,097 plus 45c for each $1 over $180,000
If you’re focused on paying off your mortgage over super at the moment, you may be reconsidering.
While there are some great ways to save money whilst lowering your mortgage repayments (like using offset accounts etc.) with the numbers you’ve just seen above, there could be an even better alternative…
For some, the mortgage simply might not be cutting it when the full effect of tax kicks in.
So, if you were asking the question about how you could easily save a bit of tax each year, you might like to pay close attention to this next part.
We’ve prepared an example to demonstrate a scenario where you could put extra money towards your home loan and one where you can salary sacrifice to realise the benefits of superannuation (contribute extra to super).
Meet Harry, 51 - Harry works as an air traffic controller.
And Jess, 47 - Jess works in administration at a hospital.
Together, Harry and Jess earn a combined annual income of $180,675.
After tax and super contributions, they take home $139,740
Right now, they own just over half their home worth $650,000, they have savings of $10,000 with 15 years left on their mortgage at their current rate.
Their kids have just moved out of home and they are finding they have more time on their hands to spend with friends, and more money in the bank with less expenses.
At this stage of their life, they’re wondering: “what should we do with our spare income and savings? Should we try and pay down the mortgage or top up our super?”
Debt / Mortgage
Annual spend - lifestyle
Annual spend - mortgage 15 years
Ability to save, invest and contribute
They know that their combined superannuation of $150,000 is not enough to support them in retirement – so what to do?
Their principal and interest mortgage currently costs them around $24,000 per year.
At the same time, they are already contributing $12,000 to superannuation through compulsory contributions (employer contributions).
What would happen if Harry and Jess contributed more to their super?
Individually, they are allowed to contribute $25,000 per year.
Because Harry is the higher income earner, he would benefit most (tax-wise) to contribute more to super. Jess’s salary is lower and therefore does not incur the same tax rates.
If Harry contributed an extra $15,500 to the full amount of $25,000 through salary sacrificing, he could save an additional $3,772 on tax. Jess could save $1,853.
This means together they would save $5,625 a year on tax when their salary sacrifice was just over $24,000 to their superannuation.
Tax payable on income
Tax on SGC
Tax payable on income
Tax on super contributions
Net Take Home
Net Take Home without salary sacrifice
Combined net income
Capacity without salary sacrifice
Capacity with salary sacrifice
Net increased super contribution
Net total super contribution
Without extra mortgage contributions, they are on track to end up paying $72,914.02 in interest over the remaining 15 years.
With the extra $24,000 p.a contributions, they will only pay $29,474 in total interest over the remainder of their mortgage.
7/20 - 6/21
7/21 - 6/22
7/22 - 6/23
7/23 - 6/24
7/24 - 6/25
7/25 - 6/26
7/26 - 12/26
The additional contributions of $24,000 p.a would reduce their mortgage by eight years and save them approximately $43,440 on interest.
If they contributed a similar amount of money to super over that same period of time, they would save $39,375 in tax.
That means mortgage saves ~$43,440
And Super saves ~$39,375
So, which is better?
While paying off the mortgage produces around 10% more in tax/interest savings, the growth effect that super can have over that same period of time has not been considered by this simple equation.
If you were to include a conservative growth rate of 5% on your superannuation (and apply a 15% tax rate), this would add an additional $10,115. That means the total saving and growth achieved from superannuation contributions would be approximately $49,490.
So which one is better now?
Which would you choose and why?
What about if you met the figures halfway and contributed $12,000 to super and $12,000 to the mortgage?
If you’re interested in seeing how that situation might play out in your own personal information, you should reach out to a financial adviser to help you take into account your contribution abilities, tax savings and growth prospects.
Please remember that all of these figures are not applicable to your own situation and are for example only. You should not make any financial decisions based on this information as the calculations are purely theoretical and could change based on many factors.
The big question that you’ve all been waiting for. What’s best for you? Paying off your mortgage or topping up your super?
As you’ve just seen, super can give you an advantage on the tax front. And, when you’re able to minimise your tax it gives you more dollars to play with or invest later on.
Another important consideration is the impact of those dollars.
We briefly looked at how superannuation growth compares against your home loan repayments.
So, now that you know an incredible amount about the Super vs Mortgage question, which do you think is best for you?
It’s amazing how this question polarizes us.
Some will be screaming and shouting - SUPERANNUATION!
From the theoretical numbers we have developed above, I think we can all see the value in superannuation.
When you can achieve a healthy tax discount AND achieve a better return on your money than your home loan rate, you could be on to something worthwhile for your retirement…
But that doesn’t mean you should make a mad dash for the bank and draw all of your money out of your offset account and invest in your superannuation. Does it?
The reality is that this equation can well and truly oversimplify our lives.
After all, we’re not always dictated by the numbers, we’re physical and emotional beings. Sometimes we have other needs that we’d like to meet.
It’s not all about the money and the marginal gains, even though we’d like to think so at times.
Some people like the feeling of accomplishment when they make their last mortgage repayment.
Some people like knowing they have a clean slate. And some just love knowing they OWN their home, it’s theirs, not the banks, not anyone else’s…
These are all nice things to have, but what’s really achievable in your life right now, based on your circumstances and based on your unlimited potential?
Do you have a car loan or other forms of personal debt?
Do you have a credit card that’s costing you each month?
Do you have a low savings account?
Or are you saving towards a big milestone?
There are many, many factors involved in making the decision about what to do with your money right now.
And it certainly doesn’t start and end with deciding against Super vs Mortgage for your stage of life. There are many things that can complicate our lives.
Maybe that personal loan that’s costing you 15% p.a should be paid off or consolidated first.
Maybe there’s a credit card with a balance accumulating on it.
That special event (like a child’s wedding) could take priority.
We don’t know your personal circumstances, but what we do know is that life can sometimes get in the way. This is especially the case when you don’t have a plan.
Without a plan to bring the puzzle of life into a meaningful canvas, we will always be wondering if there’s something else we should be doing. What’s missing or what am I missing out on??
At the end of the day, it’s a gross generalisation to say that superannuation is the best option for everyone, right now.
What we can say is that when home loan rates are low and the probability of strong returns exists for investments and the taxation environment favours superannuation, it can be an incredibly powerful vehicle for your retirement.
As financial advisers we LOVE the power that superannuation gives us and our client’s towards achieving long term financial goals, like a comfortable retirement and nest egg.
However, it can also be the strategy layer that goes beyond the contribution. Where is the money invested? How is it diversified? What are the long term and short term goals you are trying to achieve? Is there any preference towards shares, gold, property, infrastructure etc. and why?
Are we in a growth stage of the investment cycle or is it contracting?
What particular life events do you have coming up and what commitments do you have which may cause you to call on a rainy day fund?
So while we’d like to say there is a clear winner in this argument, it comes down to you…
Your needs, your wants and what’s best for you and your loved ones now and into the future.
If you would like help exploring this topic or any other financial topics which are top of mind, please feel free to reach out to a member of our team. We have over 120 positive online reviews between our team of advisers. We’d be glad to welcome you for a complimentary conversation to see how we might be able to help you achieve your goals.
We hope this article has been insightful and we wish you all the best with your financial endeavours!