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.
Once you contribute money to your super you generally can't access it again until you retire. So it's important to think about timing. If you'll need the money before you retire, paying off your mortgage is a better option because you may be able to redraw the money or access the equity in your home.
If you're employed, your employer should be paying a percentage of your earnings into your super account. It's worth checking to make sure you're being paid the right amount. If you can afford it, making extra contributions is a great way to boost your retirement savings. And it can reduce your tax.
By putting extra funds into a linked offset account, you're “offsetting” your interest bill. This is really beneficial at the start of the life of your mortgage when your interest payments are much higher.
If you pay $100 extra each month towards principal, you can cut your loan term by more than 4.5 years and reduce the interest paid by more than $26,500. If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000.
Pay a lump sum toward the principal balance
Making a lump sum payment toward your mortgage will decrease what you owe and save money on interest. If you receive some sort of windfall, such as an inheritance or a large tax refund, you can also consider making a lump sum payment toward your mortgage.
If your income is less certain it makes more sense to pay down your mortgage. If your work income is stable, investing is more attractive. There's less risk you'll need to sell down your portfolio early to meet mortgage repayments.
In fact, O'Leary insists that it's a good idea to be debt-free by age 45 -- and that includes having your mortgage paid off. Of course, it's one thing to shed a credit card balance by age 45. But many people don't first buy a home until they reach their 30s.
Assume, for example, you will need 65 per cent of your pre-retirement income, so if you earn $50,000 now, you might need $32,500 in retirement.
How Much Super do I need in my 30s? The superannuation gap really starts to grow by this time in life. Men aged 30-34 will have stashed away around $85,100, while the balance will be significantly lower, at $64,100 for women. Later in your 30s, that balance should have grown to $130,700 for men and $92,800 for women.
Salary sacrificing superannuation is most effective for mid to high income earners. This is because the higher your income tax rate is, the more you stand to save by making pre-tax super contributions.
How to calculate superannuation. Super is calculated by multiplying your gross salary and wages by 10.5%; this is known as the superannuation guarantee.
Assuming that the average mortgage age in Australia starts somewhere between 25 and 34 years, then to work out the average age to pay off a mortgage in Australia, you just need to add a 25 to a 30-year term. This would make the average age to pay off a mortgage in Australia between 50 and 64 years.
It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to save yourself from paying more interest later. If you're somewhere near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.
Even if your investment property is negatively geared, if you can afford to cover the shortfall in rent/home loan repayments you should hold onto it. Often making the most of your eligible tax deductions are reason enough to keep an investment property.
The benefit of paying additional principal on a mortgage isn't just in reducing the monthly interest expense a tiny bit at a time. It comes from paying down your outstanding loan balance with additional mortgage principal payments, which slashes the total interest you'll owe over the life of the loan.
It's common for mortgage borrowers to opt for a longer repayment term in order to keep monthly payments low—typically 30 years. However, as time goes on, your income may increase or your lifestyle may change to free up more cash flow. If that's the case, you may be able to refinance your loan to a shorter term.
Effect of paying an extra $1 a day
You would save about $5,470 in interest (paying about $286,480 rather than $291,950). To repay the loan in five years, as claimed, would require paying an extra $201 a day — or about $113,220 a year instead of $39,600.
If you can afford to make extra payments, overpaying your mortgage means you pay less interest in the future and pay off your mortgage sooner. This means you could save a lot of money.
Paying off your mortgage early can save you a lot of money in the long run. Even a small extra monthly payment can allow you to own your home sooner. Make sure you have an emergency fund before you put your money toward your loan.
Okay, you probably already know that every dollar you add to your mortgage payment puts a bigger dent in your principal balance. And that means if you add just one extra payment per year, you'll knock years off the term of your mortgage—plus save thousands of dollars in interest.