If you have some spare money each month, you’ve probably asked yourself this question: Should I put it towards my mortgage, or should I invest it instead?
It’s a common financial dilemma, particularly for families who have built up some spare cashflow but still have a significant home loan.
The good news is that there isn't one universally correct answer.
The right choice depends on your interest rate, investment timeframe, tax position, tolerance for risk and, perhaps most importantly, what will help you feel financially comfortable.
Paying off your mortgage: the guaranteed return
One of the biggest attractions of paying down your mortgage is that the benefit is relatively certain.
If your home loan interest rate is 6%, every additional dollar you use to reduce the loan saves you interest that you otherwise would have paid.
In simple terms, paying off debt can provide a
guaranteed saving equivalent to your mortgage interest rate, because you aren't paying that interest in the first place.
There is also something to be said for the peace of mind that comes with owing less money.
Reducing your mortgage can:
- Lower the amount of interest you pay over time
- Help you become debt-free sooner
- Reduce your financial commitments
- Improve your financial resilience
- Give you greater certainty about your future finances
For many people, that's incredibly valuable.
But investing can help you build wealth
The alternative is to take that spare money and invest it.
Over long periods, investments such as shares have historically provided attractive returns, although those returns are
not guaranteed.
This is where the decision becomes more complicated.
If your mortgage is costing you 6% interest and you believe your investments could earn more than 6% over the long term, investing might appear to be the better financial option.
But comparing a mortgage interest rate with an investment return isn't quite that simple.
Investment returns can be negative, particularly over shorter periods. You also need to consider investment fees and, depending on the investment and your circumstances, tax.
So while investing may provide greater long-term growth potential, it comes with greater uncertainty.
What about your time frame?
This is one of the most important questions to ask.
If you're likely to need the money in the next few years, investing in growth assets may not be appropriate because markets can fall at exactly the wrong time.
If you have a 10-, 20- or 30-year timeframe, you may be better placed to ride out short-term market movements.
For example, someone in their 30s with a stable income, a manageable mortgage and a long investment timeframe may have a very different strategy from someone approaching retirement who wants to reduce debt and increase certainty.
Your timeframe matters.
Don't forget about your offset account
There is also a third option that can sometimes provide the best of both worlds: your mortgage offset account.
If your home loan has a genuine offset facility, keeping spare cash in the offset can reduce the amount of your loan on which interest is calculated.
For example, if you have:
$500,000 mortgage
$50,000 in your offset
you may only pay interest as though you had $450,000 owing, depending on how your particular loan operates.
At the same time, the $50,000 remains accessible if you need it.
This can make an offset particularly useful for money that you may want available for emergencies, a future renovation, a new car or another medium-term goal.
Of course, the features and costs of home loans vary, so it's worth checking how your particular offset works.
What about super?
There's another option that is sometimes overlooked: investing additional money through super.
Depending on your circumstances and eligibility, making additional super contributions can have tax advantages.
However, super is generally a long-term investment environment, and money contributed to super isn't as accessible as money sitting in your offset or an investment account.
That means it needs to be considered as part of your overall strategy rather than simply as another place to put spare cash.
So, which one should you choose?
The answer depends on your circumstances.
Here are some questions worth asking:
1. What is your mortgage interest rate?
The higher your mortgage rate, the more attractive paying down the debt can become.
2. How comfortable are you with investment risk?
Paying down your mortgage provides a relatively certain benefit.
Investing provides the potential for higher returns, but your investment balance can fall — sometimes significantly.
3. How long can you leave the money invested?
The longer your timeframe, the more opportunity you generally have to ride out market volatility.
4. Do you have an emergency fund?
Before worrying about whether to invest or pay down debt, make sure you have an appropriate cash buffer for unexpected expenses.
5. What are your other debts?
If you have high-interest consumer debt, credit cards or personal loans, these may deserve attention before investing additional money.
6. What does financial security mean to you?
This one is often overlooked.
Two people with identical finances might make completely different decisions.
One person might sleep better knowing their mortgage is being paid down as quickly as possible.
Another might be comfortable carrying a mortgage while building a diversified investment portfolio.
Neither approach is automatically wrong.
You don't necessarily have to choose one
Perhaps the most important point is that it doesn't have to be
mortgage versus investing.
You could do both.
For example, you might decide to:
- Put some extra money into your offset
- Make additional mortgage repayments
- Invest a regular amount
- Increase your super contributions
- Keep building your emergency fund
The right balance depends on your goals and circumstances.
The aim isn't to find the strategy that looks best on paper.
It's to build a financial plan that balances
growth, security, flexibility and the life you want to live.
The bottom line
Paying off your mortgage can provide certainty, reduce interest and help you become debt-free sooner.
Investing can provide greater long-term growth potential, but with greater risk and uncertainty.
And an offset account can sometimes provide a useful middle ground between reducing interest and keeping your money accessible.
There isn't a magic formula that works for everyone.
The better question isn't simply "Should I pay off my mortgage or invest?"
It's:
"What should my extra money be doing for me?"
That's where a broader financial plan can help.
At Elevate Financial Planning, we look at the bigger picture — your mortgage, cashflow, investments, super, goals and the lifestyle you're working towards.
If you're not sure what to do with your spare cash, we'd be happy to have a conversation and help you work through your options.
Your money should have a purpose.
For personalised
financial services and advice, speak with your
Financial Advisor today at
Elevate Financial Planning
- Arlan Davine (Elevate Financial Planning)
