Concessional Super Contributions vs. Mortgage Paydown: Which Is the Smarter Move?

If you have extra cash, you might be wondering whether to make additional concessional contributions to your super fund or use the money to pay down your mortgage, whether it’s on your home or a holiday property. Both options have benefits, but the right choice depends on your financial situation and goals. Let’s explore both strategies.

Option 1: Pay Down Your Mortgage

Using extra cash to reduce your mortgage can lower non-deductible debt – debt that doesn’t provide tax benefits. This approach may be particularly appealing if you prioritise financial security or want to improve cash flow sooner.

Advantages:

• Guaranteed Savings: Every dollar you pay off reduces your interest costs. For example, with a 5% interest rate, paying an extra $10,000 saves you $500 annually – effectively a risk-free 5% return.
• Increased Equity: Reducing your loan balance builds more equity in your property, which can provide financial flexibility for future borrowing or selling.
• Better Cash Flow and Peace of Mind: A smaller loan means lower minimum repayments, giving you more financial breathing room.

Downside: There are no immediate tax benefits, unlike super contributions. Over the long term, the returns from a well-invested super fund may outperform mortgage interest savings.

Option 2: Make Concessional Super Contributions

Concessional super contributions, such as salary sacrifice or personal deductible contributions, can boost your retirement savings while reducing your taxable income. This strategy is particularly beneficial for those nearing retirement. Once you reach 60, super withdrawals are generally tax-free and can be used to pay off debts while having received tax benefits on the contributions.

Advantages:

• Tax Benefits: Contributions are taxed at 15% (or 30% for high-income earners), typically lower than personal income tax rates.
• Potential for Higher Returns: Super funds often invest in growth assets, and the concessional tax rate of 15% on earnings can significantly increase your retirement savings over time.

Downside: Your money is generally locked away until age 60 and can’t be accessed in emergencies. Investment returns can also fluctuate based on market conditions.

Case Study

Brian, aged 55, has $10,000 in after-tax cash flow each year. He is considering using this to either pay down the mortgage on his holiday home or make personal deductible contributions to his super. He plans to retire at 60 and is in the 39% tax bracket (including Medicare Levy). His mortgage interest rate is 5.6%.

Option 1 – Pay Down Mortgage:
If Brian makes a $10,000 annual extra repayment for the next five years, he will reduce his debt by approximately $56,000, including saved interest.

Option 2 – Make Concessional Super Contributions:
If Brian contributes $10,000 of after-tax cash flow, he can potentially make a deductible contribution of $16,390, thanks to the 39% tax saving. After paying the 15% contributions tax, the net contribution to super would be $13,930 annually.

• If this amount is invested in super with an assumed net return of 5.6% per annum, Brian could have approximately $78,000 more in super by the time he turns 60.
• Upon retirement at 60, he could withdraw the funds tax-free to pay off remaining debt or use it for other purposes.

The Verdict

Choosing between paying down your mortgage or making concessional super contributions depends on your personal priorities – financial security now versus wealth building for retirement.

Mortgage repayments provide certainty and immediate cash flow relief, while super contributions can offer tax savings and the potential for greater long-term growth.

Need help deciding the best option for your situation? Speak with a financial adviser to tailor a strategy that aligns with your financial goals.