It feels like a simple choice, but the truth is more nuanced. The right answer can make you a stack of cash, but it’s also not as straightforward as most people think.
If your interest rate is 6 per cent, paying down debt gives you the same benefit as earning a 6 per cent after tax return on an investment — without the risk.
And then there’s the peace of mind that comes with owing less on your mortgage.
A smaller balance means less stress, more flexibility, and potentially even faster progress to financial security.
For people that value certainty, this can be an easy win.
If your mortgage keeps you awake at night or you don’t like the ups and downs of investment markets, prioritising extra mortgage repayments is worth seriously considering.
The case for investing
But on the flip side, investing opens the door to higher returns.
The Australian sharemarket had delivered an average annual return of 9.8 per cent over the long term.
And while there are ups and downs in the short term, over longer time periods the return on the sharemarket will typically outpace mortgage rates.
Investing also builds assets that can generate income through dividends or rents.
While paying off your home improves your net worth position, but it doesn’t create another income stream that can replace your work salary.
An investment portfolio can.
If you’re comfortable with some risk and have a long term timeframe, investing could compound into even more wealth than simply paying down your mortgage.
And then there’s tax
This is one area where investing can give an extra advantage.
Mortgage repayments don’t give you any tax breaks, and in fact if you’re paying down a mortgage on an investment property, you can actually be eroding your tax benefits.
But investments can deliver you tax benefits, particularly if you’re smart about how you structure them.
Australian shares give you franking tax credits that reduce the tax you pay on your investment and employment income.
Negative gearing cuts your tax when you invest into property or shares.
This all means the effective return on investing can be significantly higher than the headline numbers.
What the numbers say
To see the real difference between investing vs mortgage payments, consider this simple example.
BREAK IT DOWN: If you have a $650,000 mortgage at a 6 per cent interest rate, and an extra $1,000 monthly you could use to either pay off your mortgage or invest.
If you choose to pay off your mortgage first, your extra repayments would see you paying off your mortgage in 18 years rather than 30, and saving around $333,000 in interest costs.
Once the mortgage is paid off, you could then start investing the money you were putting towards your mortgage, and after 20 years you’d have around $130,000 in investments and be debt free.
Comparing this to the invest first strategy, by putting your $1,000 monthly into the sharemarket and earning the long term average return of 9.8 per cent yearly, your investments would grow to around $613,000 after 20 years.
You’d still have a mortgage left of around $206,000, but even after accounting for this you’d still be ahead by around $277,000 compared to the mortgage-first strategy.
But if you look over a longer time period, the gap gets even bigger.
Under the mortgage-first path, investing after clearing your debt at year 18, by the time you hit the 30-year mark, your investments would be worth around $1.2 million.
But with the invest-first strategy, you’d have been steadily investing from day one.
By year 30, your investments would be worth around $2 million, and your mortgage would be fully repaid.
That means you’re $800,000 ahead by saving the exact same amount of money, just allocating it differently.
Balance growth and security
Even though the benefits of investing are substantial, when your mortgage is new or the balance is high, paying it down faster can be worth considering.
This builds your buffer, reduces your risk, and gives you more flexibility if interest rates rise or life throws a curveball.
That peace of mind can be valuable.
But if your mortgage is manageable, i.e. the repayments are comfortable and the interest rate isn’t crushing you, the numbers show that investing usually wins over time.
Starting early and staying consistent lets compounding do the heavy lifting, and the long term returns on the sharemarket have historically left mortgage repayments in the dust.
And that extra money doesn’t just look good on paper, it creates an income stream that can support the lifestyle you want, long after your mortgage is gone.
The wrap
The truth is that this decision isn’t as ‘simple’ as most people make it seem.
The best choice for you depends on your loan, your cash flow, tax position, and comfort with risk.
For many people, the best strategy is a blend of both.
And because the stakes are high, it could be worth getting some quality professional advice to make sure you’re setting yourself up to win.
Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth. Ben’s new book, Virgin Millionaire; the step-by-step guide to your first million and beyond is out now on Amazon | Audiobook.
If you want some help with your money and investing, you can book a call with Pivot Wealth here.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.
