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Ask a financial planner

Financial Planning  |  1/02/2017  |   3 min read

Question.

I’d like to pay down my mortgage and own my home outright, but with interest rates so low, I was wondering if there is an alternative way to use my money. I’ve heard additional superannuation contributions can help reduce your tax rate.  

Answer.

In the past, paying down your mortgage was seen as an effective way to channel any spare cash you may have had. It meant you’d be debt free quicker, and avoid the long term interest associated with a home loan.
But with rates at historically low levels, things aren’t as clear cut as they used to be. In fact, some people may be better off topping up their superannuation.

When it comes to superannuation, one of the main benefits is the ability to make pre-tax contributions. Assuming you earn an income between $87,000 and $180,000 per year, your marginal tax rate is 37% plus a 2% Medicare levy. You pay this tax before you make your mortgage repayments. 

Most employers allow you to make additional pre-tax contributions to superannuation under a salary sacrifice arrangement. These contributions are taxed at 15% as they enter your superannuation account instead of being taxed at your marginal tax rate. This would be an immediate tax savings of 24% for someone with income from employment in the above tax bracket.  

The added benefit of superannuation is that the earnings from these contributions within superannuation are only taxed at 15% (or less), and available to be withdrawn tax-free in retirement.

Whether you want to pay down your mortgage and be debt free quicker vs. the long term benefits of additional super contributions will, ultimately, depend on a variety of factors, including your age, personal tax rate, debts, interest rates, and future retirement plans.

Speaking to a financial planner can help you weigh up your options, and their long term impact. 



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