Salary Sacrifice vs Extra Mortgage Payments — Which Is Better?

The Core Trade-Off

Both options reduce your effective debt or build wealth, but they work in fundamentally different ways:

• Salary sacrifice into super: Contributions are taxed at just 15% inside super (compared to your marginal tax rate of up to 45%), giving an immediate tax saving. Super then grows tax-efficiently at 15% on earnings. However, the money is locked until preservation age (currently 60) and a condition of release is met.
• Extra mortgage payments: Every extra dollar paid off the mortgage provides a guaranteed “return” equal to your mortgage interest rate (e.g., 6% rate = 6% guaranteed, tax-free return). The equity is accessible via redraw or refinancing, giving you financial flexibility.

The decision essentially comes down to: is the tax benefit of super (which could be 22% to 32% per dollar for those in the 37% or 45% brackets) worth more than the guaranteed, accessible return of paying down your mortgage?

Scenario Comparison — $500/Month Extra

The table below compares directing an extra $500 per month ($6,000/year) into salary sacrifice versus extra mortgage payments, for a worker in the 30% tax bracket ($45,001–$135,000 income). We model 10-year and 20-year outcomes at three mortgage interest rates.

At a 5% mortgage rate, salary sacrifice clearly wins over both timeframes. At 7%, the super advantage narrows significantly — and for someone who values accessibility, the mortgage option becomes more compelling despite the lower headline number.

When Salary Sacrifice Wins

• High marginal tax rate (37% or 45%): The tax saving on contributions is 22–32 cents per dollar, creating a significant head start that compound growth amplifies over time.
• Low mortgage interest rate (under 5%): When your mortgage rate is low, the guaranteed return from extra repayments is modest, making super's higher expected return more attractive.
• Long time to retirement (15+ years): More time means more compounding. The locked nature of super is less of a concern when preservation age is distant.
• Unused concessional cap space: If you haven't been maximising your $30,000 concessional cap (and have unused carry-forward amounts from previous years), the tax benefit is especially valuable.

When Extra Mortgage Payments Win

• High mortgage interest rate (6%+): A guaranteed 6–7% tax-free return is hard to beat, especially on a risk-adjusted basis. Super returns are not guaranteed and can be negative in any given year.
• Close to retirement (under 10 years): Less time for compounding reduces super's advantage, and you may need accessible equity for retirement planning.
• Need for financial flexibility: Extra mortgage payments build accessible equity (via redraw or offset). Super is locked until preservation age. If you might need the money for renovations, emergencies, or career changes, mortgage equity is more useful.
• Low marginal tax rate (16% or 19% bracket): The tax saving from salary sacrifice (just 1–4 cents per dollar) barely justifies locking money away for decades.
• Large existing mortgage: If your mortgage is large relative to income, reducing the principal faster saves substantial interest over the remaining loan term.

The Hybrid Approach

For many Australians, the optimal strategy is a combination of both:

1. Salary sacrifice to the cap: Contribute enough to maximise the tax benefit, particularly if you are in the 37% or 45% bracket. For FY2025-26, the concessional cap is $30,000 (including employer SG). If your employer contributes $12,000 in SG, you can salary sacrifice up to $18,000 before hitting the cap.
2. Direct remaining surplus to the mortgage: Any additional savings beyond the super cap (or beyond what you are comfortable locking away) goes to extra mortgage payments for the guaranteed, accessible return.
3. Use an offset account: Rather than making direct extra repayments, park surplus cash in a mortgage offset account. This provides the same interest saving while keeping the money instantly accessible.

The right split depends on your specific numbers. Use the Salary Sacrifice Calculator to model the tax impact and the Pay Calculator to see your overall take-home pay position.

Frequently Asked Questions