Almost without fail, at any financial education workshop I run, the following question comes up:

“I have some extra income. Should I use it to pay off my mortgage or put it into superannuation?”

When I first wrote this blog in 2017, the answer was pretty clear cut: lower interest rates and higher mid-range tax brackets meant super came out on top mathematically more often than not, and by a significant margin for the scenarios I ran.

On refreshing these calcs for FY25, the new tax rates and higher interest rates close the gap between super and mortgage. It’s no longer a case of super being the clear winner.

You really do have to run your numbers to know which is financially optimal.

In particular, the difference between the 15 per cent tax on concessional super contributions and whatever your top income tax bracket matters.

But: the maths fails to account for your emotions and stress levels. These aren’t nearly so clear-cut.

I’ve dedicated the following blog to answering this question, including detailed calculations. I hope you find it useful.

Let’s start with the maths.

Mortgage vs. Super: the maths.

For our worked example, meet my imaginary friend Su:

• She is 55 years old.

• She plans to work to 65 years old before retiring.

• She has a mortgage with $200,000 principal left and 10 years remaining on the loan.

• She is earning $80,000 a year plus super.

Su’s kids have moved out of home so she’s now got some extra cash. She thinks she could save an extra $1,000 of her before-tax salary per month.

That equates to $700 after tax at FY25 rates.

Assumptions

To complete the calculations, we have to make a few assumptions.

• Interest rate on mortgage: 7 per cent per annum (p.a.). Depending on when you read this, that rate may sound high or low. It’s a reasonable long term average for a mortgage, so will do for now.

• Superannuation returns of 7.97 per cent p.a. after fees et al, based on average super fund returns from FY1993 to FY2023 from Super Guide.

• Highest applicable income tax rate of 30 per cent, as she’s earning less than $135,000 in FY25. This depends on your income and so will be highly variable between individuals. You can check your top tax rate via the Australian Tax Office (ATO).

• Compulsory super at 11.5 per cent = $9,200 before tax.

• Concessional contributions only. If she makes voluntary contributions, she’s only doing those that attract the 15 per cent tax rate.

• No unused/lifetime caps. We’re not taking any unused contribution caps from previous years into account, and we’re assuming she hasn’t hit any lifetime caps.

I have not accounted for inflation. The calculations use nominal dollars all round.

Mortgage base case

Using 7 per cent interest, the minimum monthly repayment would be $2,322 per month.

If Su stuck with minimum repayments, the mortgage will be paid off in 10 years, when she reaches 65.

In total, she will have paid $278,660 to discharge the $200,000 mortgage.

Mortgage with extra repayments

Of the $1,000 per month Su has before tax, at a 30 per cent tax rate she’ll receive $700 in her salary.

If that goes into the mortgage each month, the repayments jump from $2,322 to $3,022.

With this boost, she’ll pay off the mortgage in seven years instead of 10, at age 62.

Paying the mortgage off quicker saves money because less interest is charged. Instead of paying $278,660, she’d pay $253,473 – so $25,187 less gets paid to the bank.

Once the mortgage is paid off, Su can put the extra $1,000 a month into her superannuation and earn 7.97 per cent p.a. on it.

Via this, she could add $12,000 a year in voluntary contributions before tax. Adding her $9,200 compulsory contributions, it totals $21,200. That’s below the current concessional (i.e. favourable tax rate) cap of $30,000 a year.

So, the extra superannuation contributions attract a 15 per cent tax.

With the 15 per cent tax rate on concessional contributions, that means an extra $850 added to her super balance each month for her three remaining working years.

On top of that, in the final three years, Su now has the mortgage payment available to put into super.

She can put $30,000 a year total in as concessional contributions. With $9,200 coming from salary and $12,000 coming from the extra $1,000 she was saving, that leaves $8,800 more available to contribute from her before-tax salary, or $733 a month.

$733 + $850 per month for three years = $56,998 extra into super.

Because the concessional caps are lower than the extra mortgage repayment available for the final three years, Su gets extra cash in her pay to save or invest outside super.

Before tax, the mortgage repayment equates to $2,322 / (1 - 30 per cent) = $3,317. $733 goes to super, leaving $2,584 before tax. That equates to $1,809 extra cash each month, and $65,120 in total over three years.

If that’s all a bit confusing, here’s a timeline:

Putting it into superannuation instead

The major difference between these two scenarios is the amount of extra money she has each month to contribute in the first seven years.

When taking it in her paycheck, Su’s $1,000 before tax becomes $700 to use.

If it goes directly into super, she’s getting $850 because the tax rate of 15 per cent on concessional super contributions applies. That’s 21 per cent more than taking the cash in wages.

By the time she would have paid off the mortgage (seven years), she would have contributed an extra $71,400 to super.

By the end of ten years, Su has contributed an additional $102,000.

Comparing the two scenarios

Here’s Su’s summary at end of Year 10 when the mortgage is fully paid off in both scenarios:

You might be wondering: what about the $25,187 less paid on the mortgage? Doesn’t that count in the ‘mortgage first’ scenario?

(To be frank, I wrestled with this conceptually for a while!)

It shows up as the extra cash in hand in Years 8, 9 and 10. Adding that saving in would be double-tapping, so it’s excluded from the net benefit.

As you can see, in Su’s case prioritising super is more beneficial than paying off the mortgage first.

…but we must remember the assumptions.

A lower rate of return on super, a higher mortgage interest rate, or being in a lower income tax bracket would all sway the result more in favour of mortgage, and possibly even make it preferable.

We also haven’t looked at what would happen if Su invested the $65,120 extra cash, for example in shares or even just earning interest in the bank.

This is why it’s not one size fits all. You have to look at your own situation.

Further, this isn’t just a maths question.

Don’t forget the stress…

No doubt about it, owning your home outright can be a recipe for sound sleep.

Interest rate changes, unethical bank conduct and poor job security will no longer keep you up at night. You’ll be safe and secure in the knowledge that whatever else happens, you have a roof over your head.

That knowledge may well be worth prioritising the mortgage, even if your calculations show super is a better bet.

…or the potential for rule changes…

Who the heck knows what the rules will be regarding super in the future?

With growing government debt, politicians may well decide to hit impending retirees where it hurts, most likely through caps and taxes.

There’s no such thing as ‘written in stone’ when it comes to legislation, including for super.

…or that returns aren’t guaranteed.

7.97 per cent return on super is the average of the last 10 years.

For your super, the results may be lower, or higher. We have no crystal ball to tell us what’s likely to happen in the long run.

We CAN be confident about the interest on your mortgage. You will be paying it. The sooner you pay off your mortgage, the less interest you will pay.

That’s as close as I can get to a guarantee in this scenario. So, do you take the certainty, or the hopeful estimate?

“So, how do I decide between mortgage and super?”

This is where you have to get personal.

Run the numbers for your mortgage situation and tax bracket. Your outcome might be different to this example.

Then, think about those emotional impacts.

Only you can decide what’s right for you. Maybe you are willing to risk a lower return to have certainty around your home. Or, perhaps the maths for your scenario convinced you to take the super route.

Either way, I recommend applying the “Sleep Well Test”, which is:

Will you sleep well with your choice?

And finally: you can always do a bit of both.

Perhaps you put some into super, and some into your mortgage. Or, you might change your mind in a year or two.

Just make it a conscious decision.

Author’s note: this article was originally published on the Money School blog in August 2017 and has been refreshed in July 2024.

We’re slowly migrating the blog across to Beehiiv, which means we’re losing the comments on the original Wordpress blog.

Sorry to those who asked questions or made comments, you’re welcome to re-add them here.

About Money School

If you’re new here, welcome! Delighted to have you 😁

This is the blog for Money School, an Australian financial education company.

The main site is at https://www.moneyschool.org.au, but I keep our articles over here on beehiiv.

Everything on the main site and this blog is for educational purposes only. I’m not a financial adviser, nor do I play one on Netflix. I aim to help you learn about money so you can ‘choose your own adventure’.

Money School was co-founded in 2010 by me (Lacey Filipich) and my mother, Fran White. Money School offers workshops, online courses and have an international award-winning book, published with Penguin Life in 2020.

I’m also a regular media commentator on all things personal finance. If you’ve got 16 minutes to spare, you might like to check out my TEDx talk (over 1m views!) on financial independence and mini-retirements.