Charlotte and Oliver Consider Super Vs. Mortgage

Financial planning and preparing for retirement can seem vague, too far in the future to worry about, or even hypothetical.

That’s when examples can help.

Particularly in the mid to latter years of your work life, a common retirement planning question often arises: should you pay off your mortgage or contribute more money to your super?

There is no straightforward answer to the question whether to pay off the mortgage faster or invest. So, we’ve got a real-life example that will help outline the differences between the two decisions. Oliver and Charlotte are facing this choice, so let’s peek into their lives and see how they make the choice between super vs. mortgage.

 

MEET OLIVER AND CHARLOTTE

Oliver is a professional with a Perth mining company, dealing with human resources and hiring. Charlotte is trained as an educator but is working as a manager at a computer science and technology start-up, using her transferable skills as a teacher.

They are both at the middle of their careers, in their early 50s, and their children have grown up and moved out.

As a result, they are both in a good stage of their earning potential. They also have more disposable income than in the past without those extra mouths to feed, clothes to buy and activities to fund.

That has led Oliver and Charlotte to look towards their “golden years,” and consider how they can best use that extra money to invest for the future.

SUPER VS. MORTGAGE

Oliver and Charlotte, like many people in this stage of their careers, ask a very common question: should they invest the money or pay off the mortgage?

One choice is to invest the money through what’s called “salary sacrificing.” This means they would each put more money into their super in order to save taxes. They would “sacrifice” some of their take-home salary, thus giving up (sacrificing) the ability to spend it on something else.

The advantage of this sacrifice is that they would pay less tax by sheltering the money in their super accounts. The money will help the super grow, especially with the benefits of compound interest, and they will have a bigger nest egg when it comes time to retire.

They could also take that extra money and use it to pay more toward their mortgage. This would help by reducing the overall amount of interest paid over the course of the loan and allow them to own their home outright sooner.

This won’t help save money on tax, but it will help reduce the lifetime of their mortgage, meaning they will be able to get out of debt faster.

 

WHAT SHOULD OLIVER AND CHARLOTTE CHOOSE?

Let’s look at some real-life numbers to demonstrate the difference between sacrificing salary to contribute extra to their super, or taking the extra money and applying it towards their home loan.

Here’s the scenario:

• Oliver and Charlotte earn a combined annual income of $180,675.
• After tax and super contributions, they take home $139,740.
• Their Perth home in Coogee is a little below the median house price for the area, at $650,000. They have paid just over half of that amount.
• At their current rate, they have 15 years left on their mortgage.
• They have savings of $10,000.
• The principal and interest on their mortgage currently costs them around $24,000 per year.
• They are already contributing $12,000 to super through compulsory contributions (employer contributions).

They could use their savings and their extra income to pay down the mortgage.

They could also contribute more to their super, since individually, they can contribute $25,000 per year.

CHOOSING THE SUPER

Charlotte is currently the higher income earner, so she would benefit the most when it comes to saving taxes by sacrificing salary to put it towards her super.

If Charlotte contributed an extra $15,500 to the full amount of $25,000 through salary sacrificing, she could save an additional $3,772 on tax. Oliver could save $1,853.

THE BOTTOM LINE: Together they would save $5,625 a year on taxes with a “salary sacrifice” of just over $24,000 toward their superannuation.

CHOOSING THE MORTGAGE

Let’s compare that to the impact of contributing that $24,000 to their mortgage.

At current rates over the next 15 years, if they choose not to make extra mortgage contributions, they would pay $72,914 in interest.

Compare that to the amount they would pay if they dedicated an additional $24,000 toward principal and interest. They would pay the mortgage off faster, and pay only $29,474 in total interest over the remainder of the time.

THE BOTTOM LINE: They would reduce their mortgage term by eight years and save approximately $43,440.

In comparison, the same amount put towards the super over eight years would save $39,375 in taxes.

Here’s what it looks like for Oliver and Charlotte:

WHICH IS BETTER?

It looks like the interest savings are greater. But remember that this is a simple equation that doesn’t consider the growth effect in the super. That amount should increase even with a conservative growth rate.

And then there’s the option of splitting the difference and contributing $12,000 to super and $12,000 to the mortgage.

So the answer is not as simple as it may seem, and everyone’s situation is different. Get more information by downloading our Super V Mortgage guide and contacting us for more information.

It is very important that you understand that the information above 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. It is also worth noting that the Australian financial and taxation system is ever changing, and the information above may no longer be relevant. Again, we suggest seeking professional advice from a financial adviser before proceeding.