Financial planning is really about… prioritising between the mortgage and the super

For most people, there are two main ways that they store and grow their wealth. The first is in their home, and the second is via their super.

In addition, most people finance at least part of their home using debt finance – aka ‘a mortgage.’ This is typically a person’s largest debt, and a question often arises: should a client prioritise repaying the mortgage or making additional super contributions?

ASIC provide a simple calculator that lets advisers determine what the best use of any spare cash might be. The calculator can be used to compare a regular increase in super contributions to a regular increase in loan repayments. It can also be used to examine what happens if key variables, such as interest rates, change.

For example, consider a client who is 45 with a $200,000 mortgage currently incurring 5% interest. She is earning $60,000 a year, and inherits $40,000. The calculator lets her readily compare whether this money should be paid into super (using a combination of concessional and non-concessional contributions – the tool assumes that the contribution is concessional up to the age-based limit, after which it becomes non-concessional).

The calculator tells us that she will be $11,300 better off if she contributes the money into super rather than using it to repay her home loan. However, if interest rates on the mortgage were to rise by one point, to 6%, then this flips around: she would be $10,500 better off using the money to pay off some of her mortgage. (There may be a false assumption here – the earning rate within the fund does not change when interest rates rise).

Obviously, like any calculator, there are various assumptions. One of these is the assumption of 3.5% interest (high at the moment) and a super earning rate of 3.5% plus inflation (historically low if the fund is in high growth mode). But the tool is a useful way to get a broad indicator of the best strategy available to the client.


The Dover Group