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Should we pay off our home or top up super?

Tennille: I am 30, earning $50,000, with $26,000 in super. My husband, Ben, is 31, a sole trader with a taxable income of $60,000 last financial year and has $8000 in super.

We have three young children, with a home valued at $900,000 (mortgage $280,000).

Last year we purchased an investment property, borrowing the whole amount (mortgage $410,000).

We originally bought the investment property as my husband does not contribute to super. Should we continue to pay off our investment and will it be enough for his super?

Or should he think about contributing to his super fund or setting up a self-managed fund? My husband strongly believes he should be paying off his family home rather than putting money into super. It would be nice to know if we are on the right track or not.

Paul: I reckon that life must be really busy for you two, Tennille. I had to laugh at myself. I was about to say “you guys”, which I do tend to use as an “everyone” sort of thing, but I saw our Australian of the Year and former army boss, David Morrison, saying that this is gender based and “inappropriate”.

While I hope I use it in an inclusive, affable and casual way, he did make a fair point when he said that few say to a mixed group “hi girls”, so fair call. “You two” it is.

Anyway, back to you two.

Life must be hectic. Vicki and I had three kids, now all adults, and it was a super-busy time. With the demands of a young family, your job and your husband’s business I am mightily impressed you have time to think about your finances.

I am going to go with your husband’s view, and this is not a gender bias!

You are just 30 and your husband 31. Your incomes are solid but not at a level where you are highly taxed.

So the 15% tax on money salary sacrificed into super is not really a huge tax saving for you.

Equally, you have at least 35 years to retirement. I have no idea what will happen to super over several decades, so in your shoes I’d take the more certain route and pay off the home. Interest rates are really low and likely to stay that way for a while, so it is a great chance to get rid of your loan’s principle.

It is very much like Vicki’s and my situation going back 30 years. Our incomes were not that high, so our tax rate was low, making super less attractive. We worked at clearing the mortgage and were just delighted to put the title deeds in our safe once it was paid off. By that stage our tax rate was much higher – we do tend to see peak earnings as our career and business skills develop – and we started focusing on super.

It gave us a significant drop in tax paid but, just as importantly, we were much closer to retirement.

The other advantage of clearing your home debt is that you build a tax-free pool of equity. This can be used if you sell to upgrade or – cautiously – to support an investment loan to buy other quality assets.

I have no doubt that, in time to come, super will be a key part of your planning. But this is not the time – due to your tax rates, the flexibility of keeping money out of super and the decades of possible government changes to the super rules.

Right now your wealth is pretty much 100% exposed to property and your husband’s business. But at such a young age that is fine. In the longer run super will be a great place to build exposure to local and international shares, along with other assets such as infrastructure and commercial property.

All that is in front of you. What is fantastic is that you are on a great track. You have more than $600,000 in equity in your home and an investment property. Over time you should spread your risk and diversify but I am very happy with where you are right now.

Enjoy your young family, and if your husband looks pleased that I support his views on super, tell him he owes me a beer.


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Written by Paul Clitheroe

Paul Clitheroe

Paul Clitheroe AM is a respected financial adviser and Money’s chairman and chief commentator. He is chair of the Australian Government Financial Literacy Board, and author of several personal finance books which have sold more than 600,000 copies. Email Paul your question (must be 150 words or less).

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