Latest NewsThe Big Question: Super or Mortgage ?Wednesday, 10 May 2017

The strategy: To decide what's better - saving more in super or paying off the mortgage.

Do I need to know that? How do I find out? As part of its new financial literacy initiative, the government has launched a website - moneysmart .gov.au - to help answer this and lots of other financial questions. The site includes a new super v mortgage calculator, which, for the first time, allows you to obtain an estimate of which option would deliver the greater benefit based on your circumstances.

How does it work? You need basic details such as your income, the balance on your home loan, the interest rate and how long the loan has to run. You type in how much you can save and the calculator will do the sums and tell you which option is better. For example, we looked at the case of a 35-year-old earning $55,000 and able to save $100 a week. With a $250,000 home loan at 7.15 per cent and 20 years remaining, whether to opt for super or put the extra money into the mortgage was a line-ball exercise.

Super came out slightly better but as you'd only be $431 better off at age 65, you'd have to question whether it was worth locking your money up for another 30 years.

But change the scenario and the differences can be substantial. For a 45-year-old earning $100,000 who has a $500,000 mortgage with 20 years to run, and a spare $200 a week to save, super is clearly the preferred option. The calculator found this investor would be more than $45,000 better off at age 65 by putting that $200 a week into super.

Plug in the case of a new home owner aged 30, with an income of $50,000, a $300,000 mortgage for 25 years and just $20 a week to save and the balance swings in favour of the home loan. The calculator suggests this person would be almost $3000 better off using the savings for extra mortgage repayments.

But doesn't it depend on how well my super fund performs? It does and to that extent it's worth remembering that while savings into your mortgage are a sure thing, super fund returns can be volatile, especially over the short term.

MoneySmart assumes your super fund earns 7 per cent a year after fees and taxes and inflation is 3.5 per cent.

It also assumes your income will grow in line with inflation.

But it is possible to change these assumptions if you believe they are unrealistic. You can also track the comparison between super and the mortgage over time if you want to see how they stack up before age 65.

If our 45-year-old earning $100,000 wanted to retire at 60, for example, the calculator shows he would be even better off investing in super - a $47,792 advantage over the mortgage.

Why does super perform so much better? For many people, the simple answer is that it is more tax-effective. Extra repayments on your mortgage come from after-tax income, so if you're on the average tax rate of 31.5 per cent (including the Medicare levy), you need to earn $146 before tax to save $100 to your mortgage.

If you can contribute to super before tax, however, the tax rate on contributions is just 15 per cent so you need to earn about $118 to have $100 working for you. Another way of looking at that is for every $68.50 you contribute to your mortgage, you could have $85 working for you in super. Your investment earnings are also taxed at a maximum rate of 15 per cent in super, so your money grows much faster than it would in a non-super investment.

However, as our cameos show, super tends to deliver bigger benefits for those on higher incomes as the difference between their personal tax rate and the super tax rate is greater. For lower-income earners, the exercise becomes more marginal.

MoneySmart says you also need to take into account that money invested in super is locked in until retirement.

Savings into your mortgage are more easily accessible if you need the money later on.