If you’ve received a windfall such as an inheritance, bonus or tax return, deciding where to put it is an important consideration. A common question from clients is ‘should I put extra cash into the home loan or invest in super?’ The answer to this question is not clear-cut and can depend on your age, appetite for risk and goals.
Clarify your goals
Deciding whether to pay off your mortgage or invest in super really comes down to your priorities and your tolerance for risk.
Many people just want peace of mind, and there’s no doubt that being mortgage free is a great way to achieve that. Paying down your home loan quickly will minimise interest costs, for sure, but it is not always a bad strategy to run the full term of your mortgage, provided you put those additional funds to good use.
If your goal is more focused on wealth accumulation, it may be prudent to do some number crunching, as there may be other ways to invest the money you would have used on extra payments. Provided you invest wisely, this could make a significant difference to your long-term financial security.
How close you are to retirement can also impact your decision-making.
Paying off your mortgage
The idea of being mortgage-free is very appealing and often a key financial goal for our clients. Paying off your home loan as quickly as possible to avoid paying excess interest has many benefits. In practical terms, paying down your mortgage provides a guaranteed ‘return’ that is equal to your mortgage rate. If your rate is 6%, paying down the loan is a guaranteed 6% saving with no tax or investment risk.
Earlier in life, paying down the mortgage faster is usually more of a general preference. As retirement approaches, it often becomes a specific target. Many people want the loan paid off before their income drops to a pension or a reduced retirement income. That can pull some priority back toward extra repayments or offset balances, especially if there's still a meaningful loan balance left.
If your loan allows, you can also redraw funds if needed.
Extra contributions to super
When you add to your super, the money is generally locked away until you meet a condition of release, which is usually retirement age. But you will benefit from concessional tax treatment and decades of compounding if you're contributing early.
When you're 30, putting money into super means you won't see it again for 30-plus years. When you're 58, and retirement's a few years off, that gap closes significantly, and the illiquidity issue becomes much less relevant. This can tilt people towards making bigger super contributions as they approach retirement.
If you haven't used your full concessional contributions cap in earlier years, and your total super balance is under the relevant threshold, you may be able to carry forward unused caps for up to five years. This is a tool that's most valuable late in a career, when income is often at its highest (and therefore the tax benefit).
Consider your tolerance for risk.
Money going into super close to retirement has less time to ride out market volatility before it's likely to be drawn down. This doesn't necessarily mean avoiding super, but it often means that the investment option within super matters more, which can make some people more cautious about making large lump-sum contributions right before they plan to retire.
In simple terms, offset deposits and extra mortgage repayments favour flexibility and guaranteed, tax-free ‘returns’ (in the form of interest saved). Super favours long-term growth and tax efficiency, in exchange for giving up access to the money for years or decades. However, there are some reasonably complex variables to think through, which is why there is considerable value in seeking professional financial planning and investment advice. Each client’s circumstances are unique, and we can tailor a plan to suit you. Get in touch.
General Advice Warning: The information provided in this article is general in nature and does not consider your particular investment objectives, financial situation, or insurance needs; we therefore recommend you seek advice tailored to your individual circumstances before making any specific decisions.
Dobbrick Financial G Pty Ltd ABN 57 686 172 109 and Dobbrick Financial Services (Ipswich) ABN 86 100 184 521 and their advisers are authorised representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
