By Simon Tworek
Putting money into your home loan allows you to pay off your debt quicker and save interest. On the other hand, investing the money in your superannuation allows you to build your retirement nest egg. These are both great options – but which one is best for you?
When weighing up your options, we need to consider the following:
Mortgage interest rate
Where is your home loan at currently? Make sure to find out the current details of your mortgage – such as its current balance, current interest rate, and whether it has a fixed or variable interest rate. You should also check if the mortgage allows you to make extra repayments, and if it does, clarify its fees and restrictions.
Tax benefits in mortgage
Will you live in this home forever or is it likely to become an investment property in the future?
The basic rule of the tax law indicates that only income generating properties are eligible for tax deductions. If your home does not generate an income, you are not entitled to claim deductions on the interest or expenses associated with your home maintenance. Making extra home loan repayments therefore does not provide immediate tax benefits.
Concessional tax rate
What kind of contribution into super are you thinking about – is it the kind that gives you a tax concession or is it an after tax contribution? You need to compare the tax rate you’re paying on your income against the tax charged on your employer’s super contributions (which is taxed at 15%).
Your marginal tax rate varies depending on your taxable income and you can only benefit if your marginal tax rate is higher than the concessional tax rate of 15%. So this means the higher your income, the higher your marginal tax rate is, and the more you can save when making additional super contributions.
Compound Interest
Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings, working your wealth like a snowball.
Find out how compounding can work for you and where will you achieve a higher compound return over the time you invest. Compounding will work in your favor when you start early, when you make regular investments, and when you allow your investments to grow.
As Albert Einstein quotes, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.”
So what’s the outcome?
Guess what?! There is no right answer – only what is right for each individual. Often contributing additional funds into superannuation is a better financial decision, but the emotional weight of finishing off paying your home, can outweigh everything!
We are more than happy to have a chat with you about your individual circumstances, so please get in touch for a FREE consultation meeting.