It’s the age old question of where to invest any surplus of money, into your superannuation funds or should you feed it into your mortgage to pay it down quicker?
ASIC’s Money Smart team have developed a new online tool to help Australians settle this crucial investment question. It is a major concern for many families, with borrowers concern the banks will invariably lift interest rates. By paying down your mortgage, many see this as building up an equity buffer, while those nearing retirement may be more incline to boost their superannuation.
Miles Larby, head of financial literacy at ASIC, spoke with the New Daily and said his team created the tool because the choice between home ownership and superannuation impacts a large section of the nation.
“For many people these are amongst the biggest financial decisions they will face,” Mr Larby said.
“A good place to start is to ask yourself if you want to access your money before retirement or not, should you need it. The answer may differ depending on your financial goals and whether you’re planning to retire in the next few years.
“As with any important financial decision you should consider the option that best suits your financial and lifestyle priorities, and seek professional advice if need be.”
Diversification can be a good option by splitting money between superannuation and the property market, but we all know how good it feels to pay down debt. The joy of seeing your mortgage figure decreasing. ASIC suggests it is important to compare the two options logically.
There are two ways to put extra money into a super fund: through salary sacrifice (an amount deducted from your pay cheque and taxed at 15 per cent) and through after-tax contributions.
If you are considering salary sacrifice, then factor in the income tax you’ve saved and the fund’s expected return, and compare it to the interest you’ll save by paying down the mortgage faster. In other words, do the math and see the numbers in plain sight in front of you.
Keep in mind there are limits on how much income you can shift into your super.
Also, don’t forget that if you earn less than $37,000 a year, the government will pay up to $500 extra into your super account per year, depending on how much you and your employer contribute before-tax.
Melbourne-based financial planner James McFall, managing director at Yield Financial Planning, said paying down a mortgage can make more sense if the loan is recent, and the borrower’s equity position poor.
“Doing so will not only create an equity buffer for yourself, which is a pivotal part of your own personal risk management – against risks such as being made redundant – but it gives your asset time to grow also,” Mr McFall told The New Daily.
Debt reduction is also a good option if your investment focus is on the short term, say the next one to five years, Mr McFall said.
A third alternative, included in the ASIC calculator, is putting your money into a savings account or term deposit.
Given current ultra-low rates, your extra cash will probably get a better rate of return in either a super fund or with debt reduction. But having an emergency fund is important too.