Mortgage v super: Where should you invest your extra money?

Real Money, a free weekly newsletter giving expert tips on how to save, invest and make the most of your money, is sent every Sunday. You’re reading an excerpt − sign up to get the whole newsletter in your inbox.

There are a few questions you see pop up time and time again in personal finance, ones such as “How should I invest $10,000”, “What’s the best way to save for a house deposit”, and, of course, “Can I still get the pension if I have $5 million worth of gold bullion”?

But easily one of the most common problems I come across is the age-old battle between your mortgage and your superannuation, and where you’re best off investing surplus cash. This makes sense, as about a third of us have mortgages, another third of us are renters who likely aspire to have a mortgage, and all of us have superannuation.

Is it better to pay extra off your mortgage, or top up your super?Credit: Aresna Villanueva

They’re both also considered some of the best investments you can make. Superannuation is a forced, long-term investment with some of the friendliest taxation rules in the country. Mortgages allow you to own property − another tax-friendly investment − without coughing up the full cost upfront on a generally reasonable repayment plan.

What’s the problem?

While many people are perfectly happy sitting back and paying off the minimum on their mortgage, or letting their super accrue until retirement, both schemes have ways investors can do more to save more money for the future or pay off their debts early. The hard part is knowing what will work best.

What you can do about it

Today, I’ve asked two financial advisers to give their perspectives on each side of the argument to help you decide what might be worth the extra investment:

• Supercharge your super: Dawn Thomas, senior financial adviser at The Wealth Designers, says there are many opportunities to boost your wealth through additional super contributions, noting the tax comparisons between it and your mortgage “just don’t add up”. Thomas says salary sacrificing into your superannuation immediately reduces your taxable income, plus the 15 per cent taxation on your super earnings is tough to beat. “You can potentially get greater long-term return on funds if they’re in a diversified portfolio which has a decent amount allocated towards growth assets,” she says. “You can also pay down your mortgage from superannuation funds when you reach your 60s.” While many of these benefits look like a winner on paper, Thomas notes the nature of super means it’s locked away until retirement, meaning it won’t be much help to you in case of an emergency.

• Maximise your mortgage: Grace Bacon, financial adviser and director of RSM Financial Services Australia, says if your retirement is still many years away, it may make more sense to invest in your mortgage to help reduce the interest on your home loan. “At a time when the average interest rate is sitting above 6 per cent, you would need to see a higher return on investment than your mortgage rate to justify investing elsewhere,” Bacon says. She also echoes Thomas’s view that mortgage funds are far more accessible than super, something that can be a major benefit during tough financial times. “An investment in your mortgage − via extra funds sitting in an offset account for example − generally offers much more flexibility and access to utilise this investment if needed than if it was in your super, which may be difficult to access outside of retirement or specific government schemes,” she says.

• How about both? However, you may be able to have your cake and eat it too. Thomas says a smart way to safeguard your finances is to have an emergency fund, typically six months of salary, which you could keep in an offset account alongside your mortgage. Once you have this, you could start making additional super contributions, leaving you covered in case of an emergency, but still saving on interest and topping up your retirement funds.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.