Which is smarter – to save with super or pay off the mortgage?

For many years now it has been ingrained into the Australian psyche that the best way to get ahead and ensure you have enough money in retirement, is to pay off the mortgage on your home as soon as possible. The only other option is superannuation – if you believe everything you’re told and the way most of our parents did things throughout their life.

Now the government has launched a website – www.moneysmart.gov.au  – to help people determine whether saving in a super fund or paying off your home is the most productive financial tool at your disposal.

According to a report on domain.com.au, the site includes a super versus mortgage calculator to provide an estimate of which option would deliver the greatest financial benefit based on your individual circumstances.

By plugging in details of your income, mortgage balance, the interest rate on your loan, how long it has to run and how much you can save, the calculator determines which would provide the better outcome.

For instance, in the report they use the example of a 35 year old who earns $55,000 and can save $100 per week. They have a $250,000 home loan at an interest rate of 7.15% and 20 years remaining on the life of the mortgage. In this instance, they came out $431 better off with super at age 65, leading to the question; is it really worth locking your money away for another 30 years for such a measly outcome?

On the other hand, a 45 year old who earns $100,000 and has a $500,000 mortgage with 20 years to run and can save $200 a week would come out on top with the super option. This investor would be more than $45,000 better off at age 65 if they save that $200 in their superannuation fund.

The report goes on to cite a 30 year old with a $50,000 income, a $300,000 mortgage for 25 years and only $20 a week spare cash to save. In this instance, the winner is the home loan option, with the person almost $3000 ahead if they put their savings toward extra mortgage repayments.

Of course these calculations are based on certain assumptions; namely that your super fund earns 7% annual interest after fees and taxes and that inflation runs at an average of 3.5% and your income will grow in line with this.

But as we know, superannuation is not so cut and dried. With funds playing the share markets, it is a more volatile prospect and can go up or down rapidly depending on the economy of the day.

Super is better than paying off your mortgage.
Overall though, the reason superannuation seems to perform so much better than simply paying off your home – particularly for high income earners who have substantially more to save – is that it’s the more tax effective option.


Because the extra payments you make on your mortgage come from after tax dollars. In other words, if you’re tax rate is 31.5%, you will need to earn $146 before tax in order to make an extra $100 payment on your mortgage.

However, if you can contribute to your super fund before tax, the rate applied is only 15%, meaning you only need to earn $118 to have $100 working for you. Another way to look at it is for every $68.50 you contribute to your mortgage, you could save $85 in super.

This is why the superannuation option is more effective for high income earners who are subjected to a higher tax rate than lower income earners.

Of course the other consideration is that when you put your money in a super fund, it’s locked away until you retire, as opposed to savings in your mortgage that you can often access at any time (depending on your loan product).

Where does property investment fit in?
This is all well and good, but for me the big question is; where does property investment figure into this equation?

Yes, superannuation can be beneficial to some degree, but when it comes to creating wealth over the long term and replacing your working income at retirement, I really believe you can’t go past real estate.

If you consider the arguments made in this report for superannuation – primarily it’s tax effectiveness for high income earners – property wins hands down.

One of the great things about proeprty is the main profir – the capital gain is not taxed AT ALL, unless you sell (which I strongly advise against anyway) and there are numerous tax deductions and savings to be made when you have an income producing property portfolio.

Not to mention the fact that your returns are far less volatile if you invest in proven areas that have shown consistent long term capital growth. In most instances, you can expect an average overall return of around 15% per annum (10% capital growth and 5% yield), on property that outperforms the averages.       

Then of course there’s the potential to access any money you save in a property portfolio if need be – it is not locked away until you retire as with super.

So for my money, it’s property all the way! And today you can buy property with your super if you do it right.


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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au

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