When it comes to managing your finances, conventional wisdom says you should pay off your mortgage first. After all, the interest isn’t tax-deductible, so why wouldn’t you want to get rid of this debt as quickly as possible?
While this makes sense for many people, it’s not the right strategy for everyone. Before you throw all your spare cash at your mortgage repayments, consider some alternative strategies that could put you in a better financial position.
The After-Tax Dollar Challenge
The key here is that mortgage repayments come from your after-tax income. That means you’ve already paid tax on the money you’re using to pay down your loan, which can make a big difference to the true cost of your decision.
Strategy 1: Salary Sacrifice to Superannuation
Let’s look at an example. Suppose you have an extra $80 per week you’re considering putting towards your mortgage. If you’re in the top marginal tax bracket (47% including the Medicare levy), there’s an interesting alternative to consider.
Instead of applying that $80 directly to your mortgage, you could ask your employer to salary sacrifice $150 into your superannuation. Here’s how the numbers work:
- Salary sacrifice contribution: $150 per week
- Tax on super contribution (15%): $22.50
- Net reduction in take-home pay: $80 per week
Result: You’ve contributed $127.50 to your super while only reducing your take-home pay by $80. If your super fund is earning returns that beat your mortgage interest rate, you’ll come out ahead.
Strategy 2: Investment Property or Shares
Another option to consider is using your surplus income to fund an investment property or share portfolio, potentially with the help of borrowed funds. Investment loans often have tax advantages that home loans don’t, as the interest is tax deductible.
If the combined income and capital growth from your investment exceeds your home loan interest rate (after tax), this strategy will leave you better off financially and build your investment portfolio.
The Bottom Line
While paying off your home loan gives you certainty and peace of mind, it’s not always the best financial decision. The right strategy depends on:
- Your current tax bracket
- The interest rate on your mortgage
- Expected returns from alternative investments* Your risk tolerance
- Your overall financial situation
Get Advice
Everyone’s financial situation is different and what works for one person may not work for another. Tax rates, available funds, personal goals and risk profiles all come into play.
Before making any big financial decisions we strongly recommend you speak with a qualified financial adviser who can assess your individual circumstances and help you develop a strategy that aligns with your long-term goals.
Get in touch with our Newcastle-based team today to chat about your mortgage and investment options. Our experienced planners can help you work through these decisions and create a plan that’s right for you.
