Super or mortgage: Where should I put my extra savings?

In this guide

Mortgage interest vs super fund returns
Tax savings
Why choose the mortgage?
Case studies
The bottom line

It’s a common question that arises when people have money they can afford to save and want to make the most of it. Is it better to pay down my mortgage or make extra contributions to super and boost my retirement savings?

Answering this question, like many things in life, is not simple.

The option that is most likely to leave you financially better off depends on several factors:

How your mortgage interest rate and super investment returns are expected to compare in the long term
Your income (and income tax bracket)
How much space is available for you to make tax-deductible contributions to super under the concessional cap.

Of course, any decision involving your home is unlikely to be purely financial. Repaying the mortgage may give you a sense of emotional security or the freedom to move on to a larger property or renovate.

Mortgage interest vs super fund returns

When you make additional mortgage repayments or save in a mortgage offset account you’re effectively ‘earning’ the interest rate attached to your mortgage on your savings.

When making a choice between saving in super or towards the mortgage, it’s natural to compare the interest rate on the mortgage with the likely investment return from your super. Both your mortgage and super are long-term savings vehicles, so the average return over a long period of time is important.

At the time of writing, the average standard variable interest rate is around 6.55%. The long-term historic average is hard to come by, but according to the Reserve Bank of Australia (RBA) the five-year average to June 2024 was 4.06%. If you think mortgage interest rates are likely to fall from their current highs, then you may need to factor this into your calculations.

The returns from super have also been relatively high recently, and substantially higher than mortgage interest rates. According to Chant West, in the year to June 2024 the average return from Growth funds (61–80% growth assets) was 9.1%. The average annual return over five years was 6.3% while the return over 10 years was 7.2%.

While history can’t tell us what will occur in future, it can give us information about trends.

The investment strategy you have chosen for your super will also affect the likelihood that your super return outpaces your mortgage interest rate. More conservative options with lower exposure to growth assets like shares and property have a lower long-term return while more growth-oriented options are more likely to experience a return higher than mortgage interest rates.

If your contributions to super will be non-concessional (after tax), the only way saving in super can leave you better off financially is if your super return is higher than your mortgage interest rate. However, if you can make concessional contributions, the picture changes thanks to tax savings.

Tax savings

If your marginal tax rate is higher than the 15% contribution tax for concessional super contributions, you can reduce income tax by making concessional super contributions. The higher your income, the greater the tax savings, but everyone earning more than $45,000 may benefit.

Find out your income tax bracket.

Reducing the tax you pay increases the amount you can afford to contribute to super vs the mortgage, for the same cost to your after-tax income.

Example: Melissa

Melissa earns $150,000 per year. She pays 39% tax (including Medicare Levy) on each dollar she earns above $135,000.

Melissa has decided she can afford to save $500 a month from her take-home pay.

If she saves outside super, she can put $500 per month into an investment (or her mortgage offset account). Alternatively, she can salary sacrifice $819.67 per month to super. This will only reduce her take-home pay by $500 because she would otherwise pay income tax of $319.67 on this amount.

After 15% contribution tax is deducted, $696.72 will be credited to Melissa’s super account.

For Melissa, making concessional contributions to super means nearly $200 a month extra going into her investment.

When making concessional contributions to super, it is important to be mindful of the concessional contribution cap. Contributions above the cap do not generate a tax saving because they are taxed at your marginal rate.

If you are an employee, remember that contributions your employer makes for you are counted in the cap. If you’re a high-income earner, you may not have much room to make additional contributions on top of what your employer pays.

Lastly, if your income plus concessional super contributions exceeds $250,000 for the financial year, additional tax applies to your concessional contributions – Division 293 tax. This reduces the tax saving from concessional contributions but does not eliminate it. People with income at this level are liable for 47% income tax (including Medicare) and pay a total of 30% tax on concessional super contributions – generating a tax saving of 17% from concessional contributions that are under the cap.

Learn more about concessional contributions.

Why choose the mortgage?

While the competitive return of super and the tax savings available make it attractive, the biggest pitfall is that it is preserved until you retire or meet another condition of release.

Learn more about when you can access your super.

The clear advantage of making additional mortgage repayments or saving in your mortgage offset account is flexibility. Additional mortgage repayments can generally be redrawn if needed and the funds in an offset account are always accessible.

If circumstances change, the saved funds can be used for other expenses.

For younger people, super may be unattractive because of the length of time savings will be locked away, even if it would make sense financially.

Perhaps you have a short-term savings goal like a dream overseas trip. Accumulating those savings in a mortgage offset account would reduce your interest charges while you save and withdrawing the money later to pay for your trip would be simple. Saving in super would not allow you to achieve this goal – unless the holiday is taken after retirement!

You may just feel more comfortable knowing that your mortgage is paid down as much as possible. Some of us feel safer when debt is minimised, particularly when interest rates are high.

Maybe you have additional income you can save now but are worried about affording mortgage repayments if interest rates were to rise in future or when your fixed-rate period ends.

Directing your savings towards mortgage offset to build a buffer zone could make more sense than saving in super. This way, if your mortgage payments rise you can draw from the savings to help meet the increased cost.

Another consideration is that to achieve an investment return from super that is competitive with your mortgage interest rate you will need to accept some risk of short-term negative returns. By choosing your mortgage offset account or additional repayments, you can lock in a risk-free and tax-free return.

Case studies

It is important to note that all modelling relies on assumptions. The outcome will vary if real-life circumstances are different.

The examples below have been modelled using Moneysmart’s compound interest calculator (interest compounded annually) and a mortgage amortisation calculator using a mortgage interest rate of 6% and super return of 7%. The super return used is broadly reflective of the 10-year average for Growth super investment options after investment fees and tax.

They are simple illustrations only and do not consider the impact of super administration fees, mortgage fees or the variability of super investment returns. Estimates have not been adjusted to account for inflation and assume salaries, tax rates and contribution limits remain static throughout the modelled period.

Approaching retirement – Robert and Theresa

Robert and Theresa are 55 and plan to retire in 10 years. They borrowed $450,000 to buy their current home 10 years ago and have been making minimum repayments. Their remaining loan balance is $343,500 and their monthly payment is $2,900.

The couple both earn salaries of $100,000 per year and are not making any voluntary super contributions.

Option 1: Additional mortgage payments

The couple could repay their mortgage in 10 years and be debt free on retirement by increasing monthly mortgage repayments to $3,825 per month – an additional $950 per month.

If they choose this path, they will not accumulate any voluntary super savings but will be debt free on retirement.

Option 2: Additional super contributions

If Robert and Theresa instead decide to salary sacrifice, they can each contribute $698.50 per month.

After tax, this will reduce their take-home pay by $475 each – a total of $950 combined, the same as the additional mortgage repayment they are considering.

The net amount added to super after contributions tax will be $1,187.45 ($593.73 for each person). After 10 years, these net contributions are expected to grow to $196,800.

The couple will still owe $150,000 on the mortgage at retirement.

The comparison

By contributing to super, Robert and Theresa can repay the remaining mortgage at retirement using the additional super savings they accumulated. After the mortgage is repaid, $46,800 is estimated to remain.

For the same monthly cost, the couple can accumulate these additional retirement savings, while still achieving their goal of a debt-free retirement.

It is important to remember that real returns from an investment option in super that is expected to have a long-term average return of 7% per year will vary substantially each year during a 10-year period.

For example, there is the risk that a market crash could occur immediately before Robert and Theresa retire, wiping out some or all the benefit the couple accumulated by saving tax with super contributions. If the couple are not comfortable with the risk of this type of investment, they could consider a more conservative investment option in super or may prefer the security of saving directly into their mortgage, despite the tax advantage of choosing super.

What if the super return was lower?

If we instead assume the super savings will earn 5.5% – lower than the mortgage interest rate and more reflective of a conservative super investment with a smaller allocation to growth assets and less risk of a badly timed fall in value – the salary sacrifice is estimated to accumulate to $183,400 at retirement.

Robert and Theresa are still estimated to be $33,400 better off by saving via super. This is because the income tax saving allows them to contribute approximately $240 per month more to super than they could put towards their mortgage for the same impact on their wallets.

Midlife – Marek

Marek is 45, single, and wants to retire at 65. He owes $500,000 on his home loan, which will be repaid in 20 years – at retirement. The monthly repayment is $3,582.

Marek earns $150,000 per year as a private physiotherapist – he does not receive any employer super contributions. He estimates he can afford to save $1,000 per month and wants to compare saving into his mortgage or super.

Option 1: Additional mortgage repayments.

If Marek directs an additional $1,000 per month to his mortgage, it will be repaid in 13 years and three months.

He is estimated to save $135,000 in interest by making these additional repayments.

Option 2: Additional super contributions

If Marek makes personal tax-deductible super contributions, he can afford to contribute $1,600 per month. This will reduce his after-tax income by $1,000 thanks to the tax saving.

After 13 years, these additional contributions are estimated to have increased his super balance by $328,700.

He will still owe $245,200 on the mortgage.

The comparison

Marek’s overall wealth is predicted to be $83,500 higher after 13 years if he chooses to contribute to super instead of making additional mortgage repayments.

He retains a mortgage of $245,200 but has accumulated $328,700 in super, compared with the position of no mortgage debt and no super savings if he had chosen to make additional mortgage payments.

However, Marek also needs to consider that if he repaid his mortgage early, the entire monthly mortgage payment he was previously making would then become available to invest, either into super or another investment.

The bottom line

Deciding whether to make additional super contributions or extra mortgage repayments can be a difficult and personal choice.

If you have space under the cap to make concessional contributions, super is an attractive option thanks to the income tax saving that allows you to save more without increasing the impact on your hip pocket. However, if you have a low income, the tax saving from super contributions may be small or there may be no saving at all.

If you can’t reduce tax with concessional contributions, either due to low income or because you have reached the contribution cap, super is a less attractive prospect but could still leave you better off if the investment return is likely to be higher than your mortgage interest rate.

Of course, money that you contribute to super is preserved for your retirement. If you can’t give up access for that long, saving via the mortgage is a more obvious choice. You may also simply have personal or emotional reasons for choosing the mortgage – the security of knowing you are minimising debt or plans to use that extra equity to renovate.

A frequent compromise is to make the best of both worlds. Why not consider additional savings towards both mortgage and super?