Consider Salary Sacrifice
Most people repay their mortgage using after-tax dollars. This is not always the most efficient use of your money.
If you have an extra $80 each week for your mortgage, you could consider an alternative. Asking your employer to make a salary sacrifice contribution to your superannuation may deliver a better outcome.
For example, if you’re on the top marginal tax rate of 47% including the Medicare levy, you could salary sacrifice $150 into your super. After tax, your take-home pay would still only reduce by $80 a week.
If your superannuation fund earns more than your home loan interest rate, you could be ahead financially. Salary sacrifice contributions are taxed at 15% inside super, which is far lower than most marginal rates. This tax advantage increases the potential benefit.
Investment Returns Can Exceed Mortgage Interest Rates
Extra income could also be directed toward investments, with or without borrowed funds.
If the combined income and growth from the investment is greater than your mortgage interest rate, you will likely come out ahead.
Historically, diversified growth investments have often delivered higher long-term returns than average Australian home loan rates. Over recent decades, these rates have averaged between 4% and 7%.
One strategy worth considering is debt recycling. This involves converting non-deductible mortgage debt into tax-deductible investment debt. Done well, this can improve tax efficiency and potentially save thousands each year.
Consult a Qualified Adviser Before Making Financial Decisions
Every person’s financial situation is different. Tax rates, available funds, personal goals, and your risk profile all affect which approach is best.
Before deciding whether to prioritise your mortgage, super contributions, or investments, speak with a qualified financial adviser. They can compare strategies and help you choose the one that aligns with your objectives.
