Ask Paul: Am I better off putting extra cash into super or the mortgage?


Q. My wife and I are 58 and 57 and looking to retire at 67. We have a nice house worth about $700,000 but still owe $420,000 at 3.79%.

We have healthy super balances totalling $515,000 and currently salary sacrifice $100 a fortnight, as we have good government jobs earning $85,000 and $45,000 respectively.

We are paying about $800pm extra into the loan to reduce it as much as possible before retirement in nine years.

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We calculate we will have about $700,000 in super at 67 and still owe about $300,000, so we would be able to pay this out and have the magical figure of $400,000 left to access a full pension.

However, do you think it would be better to put the surplus $800 into our super by salary sacrifice rather than into the home loan after tax? - Mark

A. Well, Mark, this is a tax game. Once we earn above $37,000 we start paying tax at 32.5% plus the 2% Medicare levy. Salary sacrifice sees 15% tax coming out of your pre-tax contributions.

By not salary sacrificing it means that you make a choice to pay some 34.5% tax (and more on the top part of your salary) rather than 15%.

Contributions to super save you a lot of tax and mean you have more to invest. Super funds have averaged over 9%pa since compulsory super started.

There is no guarantee that this will continue but I would be pretty surprised if, over the long term, super fund returns were not higher than your mortgage rate of interest of 3.79%.

So it seems to me that you should be better off topping up your superannuation, paying less tax and hopefully earning returns higher than the interest rate on your mortgage.


Paul Clitheroe AM is a respected financial adviser and Money's founder and editorial adviser. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section.
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