Focusing on super, instead of mortgage repayments

This strategy is best suited to clients in a higher tax bracket who are currently making principal and interest repayments on their mortgage, are close to retirement and plan to retire after age 60.

By switching to interest only or reducing the amount of the repayments, the client’s repayment amount is reduced. The amount they save on mortgage repayments, can be redirected to their superannuation fund using a salary sacrifice / personal concessional contribution strategy.

This strategy can boost retirement savings and also reduce your client’s overall tax liability. When the client retires, they have the ability to make loan repayments using tax-free super monies (once they turn 60).

Things to consider when advising on this strategy

• This strategy works best for investors who can achieve long term average investment earnings exceeding 7% per annum (based on the current increasing but still low interest rate environment.
• The strategy is not as attractive if interest rates rise.
• The strategy is less attractive if the client’s marginal tax rate drops to a lower tax bracket.
• The tax saving is restricted to how much additional concessional contributions can be made, and potentially any catch-up concessional contributions.

Case Study

Robert is a 50 year old full time employee and owns a home which he purchased using a loan. After 10 years of making mortgage repayments of $2,456.50 per month, the outstanding loan balance has now reduced to approximately $311,776, with interest charged at 5% per annum, compounding monthly.

As he is nearing retirement, he wants to explore whether he should start contributing more into superannuation. His loan terms allow him to reduce his regular monthly repayments to as low as $1,400 per month. He decides to reduce his repayments to $1,537 per month, as this allows him to salary sacrifice $1,416.66 per month into superannuation whilst maintaining his current net income.

Based on an interest rate of 5%, there will be additional interest incurred of $282 p.a. on the loan. However, this will compound for the life of the loan. If Robert maintained his $2,465.50 per month mortgage repayments, he would have repaid his mortgage at his retirement age of 65, however by reducing his repayments he will have an outstanding loan balance at retirement.

Offsetting the increased interest payable may be any earnings on the additional funds now in super and the outstanding loan balance may be repaid as a lump sum from his increased superannuation savings. Based on Robert's investment time horizon of 15 years until retirement and his attitude to risk, he invests in a 'growth' investment option, which has an average net after tax return of 7% per annum, compounding monthly.

1 Based on 2023/24 income tax thresholds, rates and offsets.
2 Assuming interest rate remains at 5% per annum, compounding monthly.
3 Assuming salary sacrifice contributions of $1,416.67 per month are maintained for the duration of the analysis and average net after tax returns are 7% per annum, compounding monthly. 

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