Mortgage versus super: Which is a better place for doctors’ money?

Medical professionals are often asset-rich while carrying substantial debt. This is partly a reflection that banks are comfortable lending to doctors, who tend to be high income earners.

Nonetheless, over the past two years we have seen a string of Reserve Bank rate hikes, and for many medical professionals this has driven loan repayments higher. This can be particularly challenging when personal debt is high.

As a result, home owners often asked whether it makes better financial sense to use spare cash to pay down a mortgage or make additional contributions to superannuation.

There is no one-size-fits-all answer, and Matthew Holden, Managing Partner at Chartered Accountants and advisory firm Brentnalls SA, says there are a number of issues for medical professionals to address.

Using after-tax and before-tax money

First, let’s consider the basics. Additional home loan repayments are made using after-tax money, with the major benefit being a saving on non-tax deductible loan interest.

By contrast, additional super contributions can be made using pre-tax money to grow a lightly taxed investment that will deliver compounding returns over time.

The tax factor is worth a closer look.

Although instinct might suggest that paying down your non-deductible debt should be a first priority, often it is the case that maximising your concessional (tax deductible) contributions to super instead will provide a greater return in the long term,” says Matthew.

“Doctors are in a sweet spot because, as high income earners, they are often on a high marginal tax rate. This leaves doctors well-placed to take advantage of the tax breaks available by making additional super contributions.”

By way of explanation, most workers can add to their super through salary sacrifice or by making additional contributions from their own pocket. Salary sacrifice means opting to have part of your before-tax salary paid to super instead of receiving the money as regular pay.

Just like employer-paid super contributions, salary sacrifice contributions are taxed at just 15%, which is likely to be a lot lower than a doctor’s marginal tax rate.

To illustrate the upside of this, let’s say Jill, a medical professional, earns $150,000 annually. Jill’s marginal tax rate is 39%^[1] (including Medicare Levy). For every $1 of additional salary she earns, 39 cents goes to tax, leaving her with 61 cents in her pocket to pay more off her mortgage. However, for every $1 Jill adds to super, only 15 cents goes to tax, leaving 85 cents invested in her super fund account.

In this way, Jill is 24 cents, or about 39%, better off for every dollar she invests in super rather than taking the money as cash in hand.

It’s a good deal. There are a few catches though.

As Matthew points out, when personal earnings exceed $250,000 annually (which may be the case for many doctors) an additional 15% tax applies to super contributions

In addition, annual caps apply that limit before-tax super contributions. From 1 July 2024, up to $30,000 can be added to super each financial year in pre-tax (concessional) contributions. This limit includes employer contributions plus salary sacrifice contributions along with additional personal contributions.

However, those with less than $500,000 in super savings at 30 June of the previous financial year may also be able to claim a tax deduction for any unused (‘carry forward’) super limits from the previous five years. For example, an unused super cap from 2019–20 must be used by the end of 2024–25 or it will expire.

The upshot is that if you qualify, it is possible to get a tax break for reasonably substantial super contributions.

What to weigh up

Superannuation is a very long-term investment, and this is a plus for compounding returns. “The earlier you start, the greater the impact of compounding,” says Matthew.

Nonetheless, he cautions, “Young doctors need to balance the merits of compounding and the potential tax savings of adding to super with the fact that superannuation can’t normally be touched for many years. With the rising cost of living and significant expenses still to come for young doctors, such as housing, travel, children’s education etc, care must be taken to ensure contributions to super do not leave you unable to achieve your financial goals pre-retirement.”

On the flipside, Matthew notes that an outstanding mortgage can impact a doctor’s borrowing capacity if they need funding for other purposes.

Fortunately, the two options – pay more off your mortgage or add to super – are not mutually exclusive. It may pay to take a balanced approach and take advantage of the concessional super contribution limits available to you and utilise any excess savings towards loan repayments (or saved in an offset account).

However, as we noted earlier, there is no single approach that is right for everyone. It’s a good idea to seek tailored advice around the strategy that works best for you.

For support identifying the home loan that is right for your needs, call Avant Finance on 1300 99 22 08, or request a free consultation with one of Avant’s medical finance specialists.