The Great Debate: Paying Off Your Mortgage or Investing?

As Australians navigate through a period of increasing interest rates, it's crucial to assess the best investment options for your spare cash. As a financial adviser, I understand that homeowners are presented with a challenging decision on whether to put their savings into their mortgage, superannuation or investing outside of super.

Let's take a closer look at the advantages and disadvantages of each option. Paying off your mortgage earlier generates a guaranteed, risk-free return. By reducing the amount of interest paid over the life of a home loan, you can save thousands of dollars in interest and cut years off the mortgage term. It's important to note that as rates rise, the benefits to homeowners from making extra mortgage repayments increase.

However, there is an opportunity cost associated with paying off your mortgage early, as markets could potentially present an opportunity to invest in heavily discounted quality investments. Investment risk tolerance and timeframe should be taken into consideration when making this decision.

On the other hand, investing in superannuation comes with its own set of advantages. People who tip money into super benefit from generous government support. Earnings are taxed at the concessional rate of 15%, which is typically lower than most income earners' marginal tax rate. This tax advantage, coupled with the compounding effect over time, can be significant.

However, there are rules around contributing to super, including contribution caps that limit workers to $27,500 of concessional contributions each year. Additionally, super is a long-term investment, with most people not being eligible to access it until at least 60 years of age.

That being said, the earlier you invest in your super, the more you will have in retirement. For example, investing $10,000 today at 8% growth and making regular monthly contributions of $500 will result in over $113,000 in 10 years.

A lesser-known reason for topping up your super, particularly for self-employed people, is financial protection from bankruptcy. Under the Bankruptcy Act, funds held in super are protected and unavailable to creditors. This protection can be the difference between being destitute or having something to live on in retirement.

Investing outside of super also has its advantages. By diversifying your investment portfolio, you can potentially achieve better long-term gains. The wider universe of assets on offer outside of super includes collectibles, vintage cars, artworks and holiday homes. However, there are rules that need to be followed when holding some of these assets in a self-managed super fund.

It's essential to consider your liquidity, time to retirement, size of your home loan and offset account balance when deciding where to invest your spare cash. If you're more financially secure in terms of net assets and employment, you're more likely to be able to make additional super contributions.

As always, it's crucial to seek professional advice from a financial adviser who can help guide you through these complex decisions. Together, we can assess your risk tolerance, investment timeframe and financial goals to ensure you make the best investment decisions for your future.