Reducing your mortgage or increasing your super: What should you do?

For many Australians, being debt free is the ultimate goal, but is it all a byproduct of retirement?

Figuring out whether to prioritize paying more on your mortgage or increasing your pension is an age-old question, with more than one answer.

Financial adviser and ProSolution Private Client director Stuart Wemyss says deciding what to focus on usually comes down to three key factors.

These are: how long you have before you reach your maximum income and cash flow; and the size of the loan relative to your income.

“If you’re a few decades away from retirement, for example, in the 1930s, it usually makes sense to prioritize paying off the loan as soon as possible,” he explains.

“This reduces the impact of compounding interest (costs) on the loan, and you have more time later to increase capital contributions.

“If you have a steady income and extra cash flow, you may be able to do both at the same time, making extra large contributions while paying off the loan faster.”

Planning for the future or reducing debt?

Victoria-based Mortgage Choice salesperson Shawna Lavis says the big difference between increasing your pension and reducing your mortgage balance is whether you want to pay off the loan now, or plan to retire later.

“I don’t think there’s one right answer, it’s the idea of ​​which bucket should you talk about first, or which bucket should you fill first?”

“And it depends on the age and stage of the person.

“I work with a lot of people who are buying houses first, putting themselves in a position to have their entire mortgage paid off, before they retire.”

Income versus loan size

The size of the loan relative to your income is also important, says Mr Wemyss.

“If the loan is large compared to your income, prioritizing payments often makes sense,” he adds.

However, if the loan amount is relatively small and you are confident that it will be paid off well before retirement, directing a large amount of excess cash may be the best long-term strategy.

When it comes to thinking about paying off your home loan, paying more gives mortgage holders the opportunity to save tens of thousands, if not hundreds of thousands of dollars in interest, Ms. Lavis explains.

“Just by making small, sensible moves, even if it’s an extra $50 a week if you can, it makes a big difference,” he said.

Although Ms. Lavis specializes in being a real estate agent, she does not offer financial advice to offer options to clients who want to stay financially on top of their mortgage.

“We would suggest that maybe they split their loan into two parts, a small split and a big split, and the big split is an offset account, and basically attack the small split by making more returns on it,” he said.

That way they pay off their loan very quickly. And once those little pieces are gone, then we’re going to have another breakup, actually.”

“Putting more money into that can help extend their retirement.”

It’s an individual situation

Ideally, the goal is to pay off the mortgage in full by retirement, while also building the largest balance along the way, says Mr Wemyss.

Extra payments in your pension can make a big difference. Photo: Getty

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“At some point, usually when your capital balance reaches somewhere between $250,000 and $500,000, investment income becomes more important than new contributions in driving long-term growth,” he says.

“From then on, integration does most of the heavy lifting. In that sense, there is a race to reach a high balance that makes sense early, because the sooner you get there, the stronger integration becomes over time,” he adds.

Actually, the emphasis depends on the client’s situation.

“If someone has a large mortgage relative to their income, say $500,000 to $1 million or more, I will generally prioritize reducing the mortgage over making larger contributions,” Mr Wemyss said.

Each homeowner is in a different situation. Photo: Getty

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On the other hand, if the loan balance is relatively small, for example under $200,000, I would generally be inclined to focus on increasing larger contributions.”

Ultimately, Mr Wemyss says that while it’s good to focus on more mortgage payments and larger contributions, it doesn’t matter if your cash flow is out of control.

“Cash management is the engine of wealth accumulation.

“This means having a clear cash flow management plan that allows you to spend wisely and avoid wasting money on expenses that do not meaningfully improve your standard of living.”

This article originally appeared on Mortgage Choice and has been republished with permission.