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Mortgage versus super a common dilemma

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Super is built on compounding interest. A dollar invested today may significantly grow over time.

However, keep in mind that the return you receive from your fund in the current market may be different to the returns you receive in the future. Markets go up and down and it is impossible to predict how much money you could make on your investment.

A dollar saved into your mortgage near the beginning of the term will have a greater impact on interest paid than a dollar saved at the end.

Each dollar going into the mortgage is from after-tax dollars, whereas contributions into super can be made in pre-tax dollars.

For the majority, saving into super will reduce their overall tax bill – keeping in mind pre-tax contributions are capped at $25,000 annually and taxed at 15 per cent by the government (30 per cent if you earn over $250,000) when it enters the fund.

Consider the size of your mortgage and how long you have left to pay it off.

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A dollar saved into your mortgage at the beginning of a 30-year term will have a much greater impact on the amount of interest paid than a dollar saved at the end. The interest on a home loan is calculated daily. The more you pay off early, the less interest you pay over time.

In a low-interest rate environment many homeowners, particularly those who bought some time ago on a variable rate, will now be paying much less each month for their home.

If you have an offset or redraw facility attached to your mortgage you can access extra savings at call if you need them. That’s different to super, where you are unable to touch your retirement savings until preservation age, or certain conditions of release are met.

Don’t discount the emotional aspect here as well. Many individuals may prefer paying off their home sooner and welcome the peace of mind that comes with clearing their debt.

Before making any decisions, it is important to weigh up your stage in life, particularly your age and appetite for risk.

Whatever strategy you choose, you will need to regularly review your options if you are making regular voluntary super contributions or extra mortgage repayments.

As bank interest rates move and markets fluctuate, the strategy you choose today may be different from the one that is right for you in the future.

John Perri is technical strategy manager at AMP

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