May 12, 2023 5:40:20 PM

Paying Off Your Mortgage vs. Saving For Retirement

Topics: Retirement, Savings, Home Loan, Superannuation 0

One of the most common questions we get asked is whether it’s best to pay off a mortgage first or salary sacrifice and pay extra into a superannuation fund, or to do both. While the answer to this question is never straightforward and will depend on things like lifestyle, financial position, and time of life, salary sacrificing can be a tax-effective strategy when implemented correctly. To help you decide, here’s an explanation of what it means and examples of how both options work.


What is salary sacrificing?

Salary sacrificing for superannuation in Australia refers to an arrangement where an employee chooses to contribute a portion of their pre-tax income towards their superannuation fund, in addition to the compulsory employer contributions. Salary sacrificing can be a tax-effective strategy because most of the personal income tax rates are higher than the 15% superannuation tax rate. By doing so, it’s possible to reduce taxable income and potentially lower overall tax liability, while also increasing retirement savings.

What are the benefits?

To explain what the benefits are, refer to the table below which shows the difference between investing after tax and investing by salary sacrificing. Each of these 3 people invested $10,000. The top line is someone on the highest tax rate who will end up with $3,200 extra invested simply by salary sacrificing, a whopping 60% more. The other two lines show people on lower tax rates, but both will still have more invested by “sacrificing”.


Marginal tax rate *

Invested after tax

Invested by salary sacrifice**




















* Includes 2% Medicare Levy

** An additional 15% tax is payable on superannuation contributions where a member has an income of more than $250,000p.a.

Salary sacrificing is made even more attractive as superannuation payouts for people aged 60 and over are tax-free.

What else should you know?

The maximum amount that can be salary sacrificed into superannuation each year is subject to certain limits and rules set by the Australian Taxation Office (ATO). It’s important to seek advice from a qualified financial professional before making any decisions about salary sacrificing to superannuation, as you need to be sure you will still have sufficient income for everyday living, you won’t need that money before you retire, and that other employment conditions will not be adversely affected.

Choosing between the mortgage and super

The easiest way to show the difference is by using a case study.

Consider Elizabeth who earns $100,000 a year. Aged 50, she plans to retire at age 60. Elizabeth is worried about paying off her $175,000 mortgage. Her mortgage interest rate is 6.25% and she is paying $23,700 a year, so her mortgage will be paid off in ten years.

An alternative strategy for Elizabeth would be to pay interest only on her loan (based on an interest rate of 7.25% for an interest only loan) and salary sacrifice into superannuation, so her disposable income remains the same.

Elizabeth's accumulation in super will grow faster and she can pay the loan off when she retires. The table below compares the cash flows of the two strategies.


Pay mortgage

Maximise super




Salary sacrifice



Taxable income



Tax and Medicare



After tax income



Mortgage payments



Disposable income



With her current strategy of paying her mortgage, Elizabeth pays $24,967 in tax and has $51,333 left over. The maximum Elizabeth can contribute to super as a concessional contribution is $27,500. This includes the total of her employer’s Superannuation Guarantee contributions and any salary sacrifice amount.

Based on the second strategy of maximising her super, assuming Elizabeth’s SG contributions are $11,000 (from 1 July 2023) and that she sacrifices an additional $16,500 from her salary, which is within the maximum allowed amount, and pays interest only on the mortgage, she will achieve:

  • She will have $16,500 extra employer contributions going into superannuation.
  • The super fund will pay 15% tax on the employer contributions, so $14,025 will be invested. If the fund earns 6.5% per year after fees and tax, and the additional contributions are made monthly, her super will grow by an additional $197,000 in 10 years.
  • When Elizabeth retires at age 60, she can cash out $175,000 from her super tax-free to pay off the loan and be more than $22,000 ahead of her current strategy.

While this article focuses on salary sacrificing additional savings to superannuation, other options may be available to achieve a similar outcome, particularly for self-employed people and those who don’t have access to salary sacrificing.

It’s important to note that the outcomes for different people will vary and will depend on factors such as interest rates, investment returns, fees charged by product providers, and changes to legislation. To find out what will work best for you, get in touch with a Mortgage Express broker who can refer you to a Financial Planner.

This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication. Whilst all care has been taken in the preparation of this material, it is based on our understanding of current regulatory requirements and laws at the publication date. As these laws are subject to change you should talk to an authorised adviser for the most up-to-date information. No warranty is given in respect of the information provided and accordingly neither not its related entities, employees or representatives accepts responsibility for any loss suffered by any person arising from reliance on this information.

Note: all tax calculations include Medicare levy of 2% 


Not for publication (for research purposes)

Australian Tax Office website “What is a salary sacrificing arrangement?”

For publication (for readers’ information)

Not for publication - Note: calculations are based on projections using the mortgage repayment and compound interest calculators. The tax calculator from was used to calculate Elizabeth’s pre and post strategy tax in the table.

While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Finservice Pty Ltd (Mortgage Express) for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication. A Disclosure Statement is available on request and free of charge.

Finservice Pty Ltd (Mortgage Express) is authorised as a corporate credit representative (Corporate Credit Representative Number 397386) to engage in credit activities on behalf of BLSSA Pty Ltd (Australian Credit Licence number 391237) ACN 123 600 000 | Full member of MFAA | Member of Australian Financial Complaints Authority (AFCA) | Member of Choice Aggregation Services.