Pay off the mortgage early, grow super or invest?

I’m a firm believer in fast-tracking your way to mortgage freedom by paying more off your home loan each month. But does this strategy stack up in today’s super-low interest environment? Let’s crunch the numbers to see.

I’ll assume you have a $500,000 home loan with a 25-year term, and an interest rate of 3%. Over the full term you’ll pay about $211,000 in total interest. By paying off an extra $50 each week, or $200 monthly, you could be mortgage-free almost three years ahead of schedule and save $25,600 in interest.

Or, you could tip that $50 into super each week. If you’re aged, say, 40, with a ‘balanced’ super fund, making before-tax weekly super contributions of $50 can mean having an extra $81,300 in retirement savings by age 67.

The difference arises because good super funds offer exposure to all major asset classes including shares. That can mean earning returns that are far higher than home loan interest rates. As a guide, the top performing super funds over the last seven years have notched up annual returns averaging 8%-plus[1]. So you’ll earn more by adding to super than you’ll save on extra mortgage repayments.

The downside is that your super is locked away until you retire . For a younger person that can be decades away. An alternative is to use that spare $50 each week to grow investments outside of super.

I’m a big fan of ETFs, which offer instant diversity at very low cost. So, let’s say you add that $50 a week (or $200 each month) into a basket of share-based ETFs. Based on long term historical returns of around 6.0% annually[2], over 10 years you could accumulate $32,800. But over 25 years, when compounding returns really kick in, you could have a portfolio worth $135,000.

Sure, these numbers don’t address basics like the impact of loan fees, tax on investment returns and  brokerage. Even so, it’s clear that while paying more off your mortgage while rates are low is a smart move, it’s also worth considering other options. Growth investments including super, can give you far more bang for your buck in a low rate world.

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