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The dilemma: home loan, super or gearing

Preferred 10 yr strategy
Concessional super  
Home loan repayment  

Should I pay down my home loan, increase my concessional super contributions or negatively gear an investment portfolio?

This is possibly the most frequently asked question by clients of their financial adviser. And possibly the most frequent answer given by financial advisers is 'it depends'!

And 'depends' it does, on a number of issues including:

  • your client's present and future tax rates
  • current and future borrowing rates (home loan and investment lending)
  • expected returns on investments
  • risk of legislative change, etc

This range of issues means it's impossible to answer the question without knowing your client's personal circumstances, and even then the answer might be based on their personal values. These more subjective values include their personal sense of well-being associated with being mortgage and/or debt free, their appetite for investment risk and desire for access to funds prior to retirement age.

With all above issues in mind, we have compared the three strategies to determine what could be the best use of a particular amount of surplus pre-tax remuneration. The interactive chart indicates the various trends, rather than a definitive answer to this question. The chart illustrates the impact that variations in investment returns and borrowing rates might have on your client's choice of wealth accumulation strategy. Based on our assumptions (see below), the chart shows which of the three strategies may be preferred at the stated investment return rate and borrowing rate at the end of a 10 year period, assuming your client is aged 60 or older at that point in time (i.e. no benefits tax is taken into account).

The chart involves complex tax, superannuation calculations and general financial principles, and is only appropriate for use by suitably qualified persons with the requisite knowledge in these areas and risks, or typically a licensed financial adviser.

  • Under the home loan strategy the surplus remuneration is taken as salary and taxed at the relevant marginal tax rate with the net after-tax amount used to reduce the loan principal.
  • The interest rate on the investment loan is equal to the home loan rate plus the gearing margin (default of 2.0 per cent per annum). The interest on the home loan is non-deductible.
  • Under the superannuation strategy the pre-tax surplus remuneration is contributed into superannuation as a concessional contribution within the applicable concessional contributions cap and accumulated in a taxed fund.
  • Superannuation benefits can be accessed at the end of the 10 year period and are received entirely tax free after age 60.
  • The gearing strategy uses the pre-tax surplus remuneration to fund the deductible interest on a loan to acquire a 100 per cent geared investment.
  • A 50 per cent CGT discount applies to the gearing strategy and net capital gains are taxed at the marginal tax rate.
  • Investment returns and borrowing rates remain static throughout the projection period.
  • Gross investment returns for the gearing and superannuation strategies are the same.
  • Investment returns are pre-tax, consist of 62 per cent capital gains and 38 per cent income (including franking credits and deferred income), 20 per cent capital asset turnover per annum, and are net of fees.
  • The marginal tax rate, current superannuation and taxation law do not change throughout 10 year projection period.

Other strategy considerations

  • Clients who are eligible for the government co-contribution by making a non-concessional contribution should be aware of the benefits of this as an alternative or additional strategy.
  • Gearing strategies which realise a large, lumpy gain (such as upon sale of a real estate investment) may cause your client to cross into a higher tax bracket. This is not accounted for in the chart as we assume the specified tax rate applies to all gains (50 per cent discount is applied).

This calculator is a software program developed by Macquarie Group Limited and its related bodies corporate (collectively referred to below as "Macquarie", "we", "us" or "our"). Macquarie is the owner of the copyright in this calculator.

The following are terms of use of this calculator:

  1. In this calculator, we have assumed a default gearing margin of 2.0 percent, we believe this to be reasonable based on RBA data. We have not made any other assumptions. You may change all the assumptions to reflect the scenario you are trying to model.
  2. The purpose of this calculator is to compare paying off a home loan, making concessional super contributions and using pre-tax income to pay interest on a geared investment.
  3. This calculator is a model only and is not a prediction of your financial outcomes or a substitute for professional advice. Your financial outcomes will depend on external factors such as tax, superannuation laws, investment earnings and inflation.
  4. This information is provided for the use of financial services professionals only. In no circumstances is it to be used by a person for the purposes of making a decision about a financial product or class of financial products.
  5. You must not (i) copy, disassemble, reverse engineer, reproduce, adapt or otherwise attempt to derive, tamper or modify the software program code of the calculator, (ii) sell, licence or in any way distribute or transmit the calculator to your customers and/or other third parties, and (iii) copy or use in any way Macquarie's name and all associated trademarks which may appear on the calculator; you acknowledge that to do any such acts would constitute an infringement of our intellectual property rights in the calculator and its trademarks, and may cause errors in the calculator and any calculations generated.
  6. While we have used all reasonable care in preparing this information, where it includes assumptions and information provided by third parties which we are not able to independently verify, we do not accept responsibility for incorrect assumptions, errors or omissions by those third parties.
  7. To the extent the law allows us to, we will not be responsible for any loss (including, without limitation, loss of data, interruption to business, loss of profits and loss of investments) arising directly or indirectly from use of the calculator.
  8. This software has not been designed for any particular investor and has been prepared in good faith and without assuming a duty of care. No guarantee, warranty, or representation is given or implied as to the reliability or accuracy of the information used to compile each index or each calculation.
  9. Macquarie do not give taxation advice. The application of taxation laws to each client depends on that client's individual circumstances. Accordingly, clients should seek independent professional advice on taxation implications before making a decision about a financial product or class of financial products.
  10. Before using the calculator you should read the Notes detailing the assumptions, if any, used in the calculator.