Super or the home?

With the changes to super coming in, allowing you to withdraw all of your super tax free at age 60, a strategy has come into play which involves paying interest only on your home mortgage, whilst using the difference between the capital repayments on your mortgage to increase your superannuation contributions.

The theory is that you gain immediate taxation benefits, with the super contributions being salary sacrificed, and when you turn 60, you withdraw what you borrowed on your mortgage and simply pay it back. The way I see this strategy, is it lets you have the lifestyle benefits of home ownership, but allows you to invest your money in assets that you may prefer to property (eg shares).

So I've run the two scenarios through my modelling software. I have taken a 30 year mortgage, with an interest rate of 8%. The super fund I have used is invested "aggressively". with projected return of around 9% pa (after tax). The loan is for $300,000.

The net benefit of the interest only loan strategy comes out to be $34,000. That is $34,000 in 30 years time. In today's dollars it's more like $15,000. Obviously, if the rate of return on the super fund is higher than 9% pa, the benefit would be greater, but I really wanted to be conservative on my projections.

There's also the added risk that interest rates will rise (or more favourable, decrease) and the legislative risk that super may be preserved beyond 60 for 30 year olds (lets hope not!).

In short, unless you can get a guaranteed return of over 10% pa over 30 years, this strategy really won't provide a huge benefit. The risks are far greater than the rewards.

The best strategy in my opinion would be to repay your mortgage asap, then once it's paid off increase your super contributions. That way you get the best of both worlds!