Should I put more into super or pay off my home loan quicker?
This is a common dilemma, and there is no golden rule. Let’s examine the advantages and disadvantages of each strategy.
Tax benefit
The super guarantee rate is 12% from 1 July 2025 of your employment income. Making salary sacrifices and personal deductible contributions in addition to the super guarantee not only helps to grow your retirement savings but also provides a tax benefit.
For example, the average annual tax rate on a $100,000 salary is around 22.8%, including Medicare (single with no dependants). The super guarantee on this salary is $12,000. Suppose someone makes a before-tax contribution of $18,000, maximising the before-tax cap of $30,000. In that case, the average tax is reduced to around 17%, and they can save around $5,760 in personal income tax. The before-tax super contribution attracts a 15% tax in the super fund. After taking into account the 15% tax on the super contribution, the net tax savings would be $3,060. (Financial year 25-26 rates used. Restrictions apply. To learn more, visit the ATO website.)
Paying extra into your principal residence mortgage provides no tax benefit because it is not tax deductible.
Accessibility of the funds
Once the money goes into a super fund, it can’t be withdrawn until you meet certain conditions.
If your mortgage has a redraw facility, you can withdraw cash when needed. If you have an offset account attached to your mortgage, you can park money there and save on interest while you have access to the funds when needed.
Investment returns vs guaranteed savings
The investment return in your super fund depends on how the money is invested. Depending on your risk tolerance level, the returns may be better than the mortgage interest rate. The tax effectiveness and the compounding return within your super fund can make a massive difference in retirement, but the investment return is not guaranteed.
By making extra repayments on the mortgage, you are guaranteed to save on the interest payment, whatever your interest rate is, and you can become debt-free faster.
So, which strategy is better?
Depending on the mortgage interest rate and expected returns from the investments in a super fund, one strategy may be better than the other. Using both strategies can sometimes provide a better outcome.
For someone who is close to retirement, say in their late 50s, they can reduce their tax bill by contributing more to their super until age 60. When they reach age 60 and retire, they can withdraw money from their super tax-free and pay off the mortgage.
For someone young with limited income and savings, contributing extra to their super may not be a good idea because they can’t access the money if needed for a long time.
So, the answer depends on various factors such as your age, savings, income, mortgage interest rate, investment preference and risk tolerance level, and what gives you better peace of mind.
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation or needs.
