Pocketing some extra cash and wondering whether it should go towards your mortgage or your super? This article will help you find an answer to that very question.

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For most Australians, superannuation plays a vital role in funding their retirement. It has the potential to be the difference between a comfortable retirement and a financially fraught one. This is why there’s such a big focus on boosting it as much as possible before finishing up your working years.

That being said, for many, there’s equal value in minimising debt and expenses, particularly housing costs , which can be a substantial financial burden to carry into retirement.

There’s no right or wrong way to approach the situation, and no definitive answer to whether you should pay off your mortgage or make voluntary super contributions. With that said, this article aims to equip you with some insight into your own situation. That way, you can hopefully decide for yourself.

How can I make voluntary super contributions, and why would I want to?

Voluntary super contributions are different from the compulsory ones made by your employer. They’re contributions you make yourself, either from your before or after-tax income.

Concessional (before-tax) contributions include salary sacrifice and personal contributions where you claim a tax deduction. Mandatory employer contributions are also considered before-tax contributions.

Non-concessional (after-tax) contributions include spouse contributions, government co-contributions and personal contributions where you don’t claim a tax deduction.

Obviously, the primary advantage of making voluntary super contributions is that you can potentially make a big difference to your savings ahead of retirement. Your super fund invests the money you contribute to grow your wealth, so much like traditional investing, you may get a pretty decent return on your investment. Historically, conservative super funds have seen average returns of about 5.3% per year .

Compound interest is another benefit. You can take advantage of it by making additional contributions to your super, especially early on in your working life. This is where you can earn interest on your interest, potentially boosting your retirement savings even more.

The other potential merit is the possible tax savings . Pre-tax contributions can reduce your taxable income and lower your overall tax bill, plus they’re taxed at a flat rate of 15% within your super. For many people, this is significantly lower than their marginal tax rate.

Why would I pay off my home?

On the other hand, owning your home outright could be an advantageous financial move come retirement. The primary reason is the elimination of mortgage payments, which can reduce your living costs quite substantially. This may enable you to allocate more of your income to other necessities like healthcare or day-to-day expenses, investing, or travel and hobbies.

Paying off your mortgage sooner could also mean paying less interest. The interest on a home loan is often substantial, so the earlier you can lower the balance on your loan, the less interest you’ll pay.

The other benefit of making additional mortgage repayments is that you can build equity in your property more quickly. Eventually, you’ll have complete ownership of a valuable asset that can appreciate over time. Then, if you need to access funds, you could consider downsizing or buying in a more affordable area and freeing up some money.

Plus, for many, the big payoff is that they can enjoy a greater sense of security and stability knowing they have a fixed roof over their heads. If you hit a financial rough patch, you’ll be safe in the knowledge that your home is no longer at risk.

It’s worth noting, however, that some people see value in not completely paying off their mortgage. Some of the benefits of keeping it include greater flexibility (if you can access a redraw facility, for instance) and opportunity (if the money could see higher returns elsewhere). If you're uncertain about this approach, but would like to know more, speak with a financial adviser.

How can I determine whether to pay off my mortgage or make voluntary super contributions?

Before you decide where to put that extra money, ask yourself these 15 crucial questions. Not every one will be relevant to you, and some may be difficult to answer if you’re still many years away from retirement. Even so, they’re worth thinking about because preparedness equals peace of mind.

You might also think that paying off your mortgage and contributing to super are really working towards the same goal. That is, they give you more money to play with come retirement. But the two are subtly different. Paying off your mortgage clears you of debt and can provide more immediate financial benefits (and peace of mind) while super is a long-term wealth-building strategy. Deciding between the two depends on your current situation, goals, and how soon you want to access the benefits.

And remember that decisions like these should never be taken lightly. If you need support, reach out to a licensed financial adviser or a legal professional for personalised advice. As far as tax is concerned, a tax agent can help you navigate your obligations and potentially optimise your strategy.

1. Do I have an emergency fund?

One thing to think about before committing extra money to either your mortgage or super is whether you have an emergency fund. An emergency fund can provide a financial safety net if you come up against unexpected expenses.

While only you can decide whether to create an emergency fund, it’s absolutely worth assessing your overall financial security and liquidity. If all of your extra funds are going towards either your mortgage or super, you may not have the liquidity needed to cover unforeseen expenses. This is especially true if you’re considering voluntary super contributions, because that money is locked away until you can access your super .

2. Do I have other debts?

Another consideration is whether you have other debts to pay off beyond your mortgage. It’s not always as simple as defining things as good or bad, but debt is typically categorised as one or the other. “Good” debt typically improves (or at least seeks to improve) your long-term financial prospects, and can include things like your student loan and your mortgage. Meanwhile, “bad” debt includes high-interest liabilities like credit cards, personal loans and buy now, pay later schemes.

How you prioritise your debt is ultimately up to you, but a popular strategy is to pay off any high-interest debt first before contemplating additional mortgage repayments or super contributions. High-interest debts can accrue very quickly, and once they’re paid off, more of your income is freed up for other financial goals.

2. What’s my risk tolerance?

While super is considered a fairly safe investment compared to many other investing options, it’s not without its risks – no investment is.

Think about whether you’re comfortable putting your money in super and facing possible market volatility for the sake of potentially higher returns. Then reflect on whether the security of an entirely mortgage-free home is a more appealing prospect – you might prefer the idea of retiring debt-free.

3. What’s my income?

There’s no hard-and-fast rule that your income should dictate what you do with your money, but it does impact the tax benefits of making extra super contributions.

If your income is on the higher end, making extra super contributions might be beneficial because you could potentially lower your taxable income. Pre-tax contributions are taxed at a flat rate of 15%, up to the current maximum contribution limit of $30,000. So, you could possibly see decent tax savings if your marginal tax rate is much higher.

On the other hand, if you have a lower income, the tax savings may not be as lucrative. You might prefer to put extra funds towards paying off your mortgage and aiming to clear yourself of debt.

4. How much super do I have?

Is your super balance looking nice and healthy or, for whatever reason, is it not quite where you’d like it to be?

There’s no single answer to how much money you need to retire . But if you do have an ideal figure in mind and you’re not sure your super is on track to reach it, think about whether additional contributions could help you achieve your goal.

If you’re satisfied with how it’s tracking, you may prefer to put any extra money towards paying off your home loan.

5. How much does my employer contribute?

In Australia, we’re fortunate to have the super guarantee, which dictates that employees must get a minimum amount of super paid from their earnings. It’s a way to help Aussies save for retirement without having to actively manage it themselves.

All employees over 18 are entitled to the super guarantee, whether they’re full-time, part-time or casual. Currently, every employee gets a minimum of 11.5% of their base earnings, but that’s set to increase to 12% in the near future. If your employer pays more than that – as many government agencies and some larger companies do – you may not see much need for additional contributions.

If you’re self-employed, you might be funding your super on your own. Consider whether voluntary contributions to your super to try and boost your savings might be more advantageous.

6. How large is my mortgage?

Are you close to paying off your mortgage or do you still have many years (or even decades) to go?

If it’s the former, you may prioritise clearing your mortgage so you can own your home outright. If it’s the latter and there’s still a significant amount remaining on your loan, those ongoing repayments could impact your cash flow and hamper your ability to save for retirement. In that case, you might prefer to bump up your super with extra contributions.

7. What’s the interest rate on my mortgage?

As you may very well know, home loans are often at the mercy of oscillating interest rates . Depending on what interest rates are doing at any given time, you might decide to act accordingly.

Many experts argue you’re better off making additional mortgage repayments when interest rates are high because you can significantly reduce the amount of interest you’re paying.

When interest rates are low, you might opt to make voluntary super contributions because the cost of borrowing is cheaper. This means you may potentially earn higher returns in your super fund than the savings from paying off your mortgage early.

8. Am I eligible for any mortgage offset accounts or redraw facilities?

If liquidity's important, know that you can't really touch your super for a long time. On the other hand, an offset account or redraw facility allows you to simultaneously put money towards your mortgage and still have access to it. If your home loan offers either of these features, you could consider whether they act as an additional incentive to make extra mortgage payments.

An offset account is linked to your mortgage and works much like a standard transaction account. The difference is that it lets you offset your loan balance with your savings. By depositing money into it, you may be able to reduce the interest payable on your loan.

A redraw facility works a little differently. It lets you make additional payments on your home loan, and then withdraw them later on if you need to. The extra payments reduce your loan balance and, consequently, the amount of interest you have to pay. You can access the money if you ever need to, but the amount is limited to your extra payments.

9. Am I planning to purchase a home in the future?

If you’re still saving towards your first home deposit, obviously paying off your mortgage isn’t yet on your radar. But making extra contributions to your super could allow you to take advantage of the First Home Super Saver (FHSS) scheme . The scheme lets you withdraw up to $50,000 (plus any earnings) of voluntary contributions to put towards your first home.

If you already own a property – be it an investment or one you live in – but are planning to upgrade in the future, you’ve got a bigger decision on your hands. Contributing extra towards your mortgage could strengthen your financial position, potentially giving you more equity to leverage down the track.

11. What’s my proximity to retirement?

If you’re still years away from retirement, you might prioritise building your super. Super is a long-term game, and the longer you have ahead of you, the more opportunity for your super to grow through compound returns – i.e. returns on your returns.

But if you’re closer to retirement, owning your home outright might be more attractive. It could mean a huge reduction in living expenses once you stop working, allowing you to allocate more funds to other expenses or even enhance your lifestyle in retirement.

12. What are my expected retirement expenses?

Think about what your ideal retirement looks like. Would you be living fairly frugally or do you envisage a more lavish lifestyle that includes plenty of travel?

A smaller savings and super balance may be enough to support a modest retirement. But if you’re hoping to live (and spend) large, you may need more financial resources to back you.

However, your mortgage balance will also affect your desired lifestyle. Continuing to make mortgage payments after you retire could put a strain on your finances and leave less for other expenses. Clearing it may free up money to put towards other costs.

13. Do I intend to get the Age Pension?

The Age Pension is a government payment designed to supplement your super. It provides you with a basic income each fortnight and is meant to help cover essential costs.

However, the government uses income and assets tests to determine the amount you get (and indeed whether you can get the pension at all). Your super balance is assessed under both the income and assets test. So if it’s very high, it may reduce your Age Pension amount or disqualify you altogether. This is something to keep in mind if you’re making additional super contributions.

On the other hand, your principal place of residence (i.e. your home) isn’t included in the assets test, regardless of its value. This means it won’t directly lower your Age Pension payments – a crucial detail to be aware of if you’re considering paying off your home. (Just note that if you’re a homeowner, you’ll have a lower overall assets threshold than non-homeowners.)

14. Will I have additional income sources in retirement?

You may no longer be an employee, but you could have other income sources once you hit retirement – like rental payments from an investment property or dividend income from shares.

If you foresee having decent income coming in, a bigger super balance may not be as much of a necessity. Instead, you may prefer to pay off your mortgage to enhance your financial security.

Otherwise, if you don’t envisage passive income being part of your financial strategy in retirement, you might boost your super balance to improve your chances of a comfortable retirement.

15. What are my long-term financial goals?

Ultimately, your long-term financial goals may help steer you in a particular direction. Contemplate what you want to achieve financially in the next 10, 20 and 30 years, and in your retirement. Do you want to be financially independent? Do you want a retirement filled with travel, hobbies and new experiences? Or would you prefer to rid yourself of debts entirely?

If you want a substantial nest egg, you may concentrate on super payments. But if you like the idea of debt-free homeownership, you might prefer to focus on your mortgage.

So, what should I do?

Ultimately, only you can answer that question. What works for one person may not work for another. Plus, you may even find yourself prioritising different financial goals throughout your working life. You might make mortgage repayments when you’re focused on reducing debt and super contributions when you want to build your retirement savings. You could also feasibly do both, working towards a decent nest egg and a mortgage-free home at the same time.

One thing that’s certain is that planning for retirement can be an incredibly complex and personal process. If you need support navigating your options, reach out to a licensed financial adviser for tailored guidance – many actually specialise in retirement planning.

Good luck, and happy investing!