Mortgage vs super: which should you pay first?



Self-employed psychologist Emma Howard has stopped putting money into her superannuation fund, choosing instead to pay down the mortgages on her home and rental property.

Ms Howard, a 37-year-old Queenslander, believes she is better off reducing the principal of the loans rather than topping up her super, at least for now.

“If circumstances change then I would probably look at a super investment, but just at this point in time this is what’s going to be best for me.”

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New research from REST Industry Super has found the vast majority of Australians prioritise their mortgages over their retirement savings, potentially placing them in a risky situation when they stop working, especially if they don’t have Ms Howard’s investment property and business savings to fall back on.

Equilibrium Health owner Emma Howard

Equilibrium Health owner Emma Howard is putting her home loans first. Photo: Supplied

The study of 1000 Aussies aged 35 to 49 found that only 15 per cent put long-term savings, including retirement, first in their list of financial priorities.

Your mortgage could be distracting you from the future

REST Industry Super chief executive Damian Hill told The New Daily that debt reduction is a “sensible and necessary financial goal”, but warned that “this should not be to the detriment of planning for the future”.

“Our point is that people don’t engage with their super until very late in life, by which time they can’t get compound interest working for them,” Mr Hill said.

Focusing on paying off the house means that over half (51 per cent) of Australians rely solely on their employer’s contribution of 9.5 per cent to save for retirement, REST Industry Super estimates, despite 12 per cent being the industry benchmark for a comfortable retirement.

ME Bank reported in August that only 30 per cent of Australians made any extra payments to super in the six months prior, down from 34 per cent in the previous half-yearly survey.

When is it time to prioritise super?

Marian Stapleton

Marian Stapleton put her superannuation first after paying off her home. Photo: Supplied

Marian Stapleton, 55, from Croydon, NSW, paid off her mortgage with her husband in the mid-1990s, which until then had dominated their finances.

Once the house was theirs, Ms Stapleton decided to put extra money into her “vitally important” superannuation, salary sacrificing into her fund for almost the next 20 years.

“If you are able to pay it off in a shorter term it then frees up more disposable income that you can then channel into things like superannuation,” she said.

REST Industry Super’s Damian Hill suggested that the time to put super first could be once you feel that your mortgage is “under control” and once you have enough savings for emergencies.

“We’re not trying to substitute super for mortgage,” said Mr Hill, who acknowledged that paying down debt has a psychological as well as a financial advantage, and assures you have a secure place to live in retirement.

To find out whether or not now is the right time for you to put super first, try out the ASIC MoneySmart calculator.

Take advantage of the tax benefits

Extra super contributions can sometimes be a better investment even when your super fund return is lower than your mortgage interest rate because of taxation, an ASIC MoneySmart spokesperson told The New Daily.

Money salary sacrificed into super is taxed at 15 per cent, whereas money credited to your mortgage is taxed at your marginal tax rate, likely to be much higher.

For example, a person earning $60,000 a year wanting to invest $1000 of before-tax income would be able to put $850 of that money into super, compared to only $675 into their mortgage, the ASIC MoneySmart spokesperson said.

Get diverse

MOZO marketing director Kirsty Lamont previously told The New Daily that voluntary super contributions can be a good way to diversify your investment portfolio, rather than putting every extra cent into the property market.

“I think it’s important to try and spread your investments out into a number of baskets. That way, if one investment goes pear shaped you’ve still got a back up plan,” Ms Lamont said.

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