Money
Mortgage stress vs super savings: where should your extra dollars go?
Got a little extra left over each month? Deciding whether to chip away at the mortgage or boost your super could shape your financial future.
By Natalie Peng
With interest rates still biting, many households are feeling the squeeze. But if you’re lucky enough to have a little left over after covering bills and day-to-day living costs, you face one of the most common dilemmas: should you put that money into your mortgage, or direct it into super?
There isn’t a single right answer. Both choices can put you in a stronger position, just in different ways.
The case for paying down the mortgage
For most Australians, the mortgage is their single biggest financial burden. Reducing it can feel like lifting a huge weight off your shoulders. Every extra dollar you pay immediately cuts the loan balance and reduces the interest charged. With mortgage rates sitting around 6%, that saving is like earning a risk-free 6%, which is hard to beat after tax.
There’s also the peace of mind factor. Knowing your debt is shrinking can ease stress and make your household budget feel more flexible. And if you manage to pay the mortgage off before retirement, you’ll need less income to maintain your lifestyle, because living costs fall dramatically when you own your home outright.
The trade-off, of course, is that while the money is safe and certain, it may not grow as much over the long term compared to investing in super.
The case for topping up super
Superannuation, on the other hand, is designed to build wealth for retirement, and it has advantages you won’t find elsewhere. Contributions made from your pre-tax income are generally taxed at just 15%, much lower than most people’s normal tax rate. This means every dollar you salary sacrifice goes further before it even starts to earn investment returns.
And those returns can be powerful: over the 10 years to June 2024, “growth” super funds (with around 70% in shares and property) returned an average of 7.2% a year after fees and tax, according to SuperGuide. That’s higher than most current mortgage rates, although of course super returns are not guaranteed and will fluctuate with markets.
On top of that, there are government incentives for certain income levels, such as co-contributions or spouse contribution tax offsets.
The catch is that super is locked away until you reach preservation age, so it can’t help with today’s mortgage pressures.
What to weigh up
When deciding where to direct extra money, it helps to think about a few key factors. Start with the numbers: how does your mortgage rate compare to the returns you expect from super? At 6%, extra repayments are attractive. But over decades, super often comes out ahead.
Your age and time to retirement also matter. The younger you are, the more time super has to compound. If retirement is only a few years away, however, the security of being debt-free can be more valuable than chasing investment returns.
And don’t forget the human side. Some people value the guaranteed progress of watching their mortgage shrink. Others prefer the idea of maximising retirement savings. If you have other high-interest debts, like credit cards, those should almost always take priority before either mortgage or super.
Why not do both?
For many households, the best approach is a balance. You might pay part of your surplus into the mortgage to ease cash-flow pressure, and the rest into super to take advantage of tax breaks and growth.
As interest rates and life stages change, the balance can shift. High mortgage stress might call for more repayments now, while stable repayments could make super contributions the smarter play.
Don’t let indecision stop you from acting
As you can see, there’s no universal rule about whether super or mortgage should come first. The best choice depends on your income, mortgage rate, stage of life and even how much you value the feeling of being debt-free. The important thing is not to let indecision stop you from acting. Either way, if you chip away at the mortgage, add to your super, or do a bit of both, you’re putting yourself on stronger financial footing.
And remember, even small steps can make a big difference over time. If you’re unsure, a licensed financial adviser can help tailor a plan that balances today’s peace of mind with tomorrow’s retirement comfort.
This article contains general information only. It is not financial advice and is not intended to influence readers’ decisions about any financial products or investments. Readers’ personal circumstances have not been taken into account and they should always seek their own professional financial and taxation advice that takes into account their financial circumstances, objectives and needs.
Feature image: iStock/Diem.ph
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