Most of us hit a point where there is a bit of surplus each pay. It might be a bump up at work, the end of daycare fees, finishing a reno, or the kids finally covering their own phone bills. The question that often follows is: should the extra go onto the mortgage, or should it be invested instead?
It is one of the more common questions I get in a first meeting. There isn’t a single right answer, but there is a useful way to think it through.
The case for paying down the mortgage
Putting extra money onto a home loan is sometimes called a risk-free investment, and the comparison is a fair one. The “return” you get is whatever interest you avoid paying, at whatever rate your mortgage is currently sitting at.
That rate is known. It isn’t going to disappoint you with a bad year, and it isn’t going to swing around with the markets. If your mortgage is at 6%, every extra dollar you put onto it is effectively earning you 6%, after tax, with no risk.
There is a less-measurable side of this too. A lot of people find real peace of mind in watching their mortgage balance come down. The emotional weight of debt is easy to underestimate when you look at the numbers in isolation, and it is a legitimate factor in a decision like this.
The case for investing
On the other side, investing offers something a mortgage repayment can’t: the potential for higher long-term returns. Shares, managed funds and property outside the family home can all, over long enough timeframes, outperform a mortgage rate. They can also underperform in any given year, which is the trade-off.
Investing can also open the door to tax benefits that paying down a mortgage doesn’t:
- Salary sacrificing into super is taxed at a flat 15% going in, rather than at your marginal rate, which can be a meaningful difference depending on your income.
- Franking credits on Australian shares can effectively reduce the tax on investment income.
- The capital gains tax discount cuts your taxable gain in half on investments held longer than 12 months.
None of those apply to extra mortgage repayments, so they can tilt the maths in favour of investing, provided you have a long enough timeframe to ride out the ups and downs.
The maths doesn’t tell the whole story
Even once you’ve compared the numbers, the right answer still depends on things the spreadsheet can’t see.
Where you are in life. A thirty-year investment horizon makes a very different case than a five-year one. The further off retirement is, the more time compounding has to do its work and the more volatility you can absorb.
How big the mortgage still is. On a $700,000 balance, the stakes are much higher than they are on $60,000 left to run. Scale changes which lever moves the dial more.
Your appetite for risk. Some people are genuinely comfortable with the idea of a portfolio dropping 20% in a bad year, knowing it will likely recover. Others would lose sleep. If investing extra money leaves you anxious, that is a cost, and the mortgage path may be a better fit regardless of what the maths says.
What will actually happen to the money. This one gets glossed over. If the “invest” option in practice means it drifts into day-to-day spending, the mortgage was always going to win. The best plan is the one you’ll actually stick to.
Questions that help narrow it down
- What is my mortgage rate today, and how does it compare with what I could realistically expect from an investment?
- How long is my timeframe? Is this money I could leave alone for ten years or more?
- Would investing give me access to tax structures I can’t get by paying the loan down?
- Does paying the mortgage off faster meaningfully change my retirement date, or is it already going to be gone well before then?
- If I invested instead, would I actually do it, or would the money quietly disappear into something else?
- How would I feel if I invested the surplus and markets went backwards for two years?
Honest answers to those questions usually get you most of the way there. Where it is still unclear, this is exactly the sort of thing a financial planner can model for you: a few scenarios side by side, factoring in your tax rate, your timeframe, and the specifics of your mortgage.
You can do both
One of the quieter options people miss is that this isn’t an either-or. Splitting the surplus, with part going onto the mortgage and part into super or an investment account, is often what ends up working, especially where there is a long runway to retirement and a reasonable mortgage balance. The right ratio depends on the specifics, but it is a reasonable place to start a conversation.
If a bigger-picture family budget is where you want to start, we work through this sort of question with clients at the Foundations stage and beyond, building a plan that balances paying down debt with building wealth, rather than treating them as competing goals.
Book an initial chat with the Insight Wealth Planning team →
Frequently asked questions
Is paying extra off the mortgage really like a tax-free return?
Interest you avoid paying is effectively a guaranteed, after-tax return at your mortgage interest rate. Because you aren’t earning the money in the first place, there’s no income tax, which makes the comparison with a taxed investment return different than it looks on the surface.
Can I do both? Split the surplus between the mortgage and investing?
Yes, and this is often what people end up doing. A split lets you keep making headway on the mortgage while also starting to build investments or add to super. The right ratio depends on your mortgage rate, how long you have until retirement, and how comfortable you are with investment risk.
Does putting money in an offset account count the same as paying off the mortgage?
Financially, yes. Money in an offset reduces the interest you pay by the same amount as if you had paid it directly off the loan. The difference is flexibility: offset funds stay available if you need them, while extra repayments typically need to be redrawn to get back.
When would investing clearly beat paying down the mortgage?
Usually when your mortgage rate is relatively low, your investment timeframe is long, you can access tax-effective structures (such as salary sacrifice into super), and you’re comfortable with the volatility that comes with investment markets. None of that happens automatically. It needs a plan.
Should the answer change as I get closer to retirement?
Usually yes. The closer you are to retirement, the shorter your investment timeframe, and the more a guaranteed mortgage-rate return starts to compare favourably with riskier growth. Many people prefer entering retirement debt-free, which can simplify the decision regardless of the maths.
Video transcript
Kate McArthur on paying off the mortgage or investing (video, 1:13).
Whether to pay your money off your mortgage or to save and invest can depend on a couple of factors.
If you’re putting money off your mortgage, it can be a risk-free investment, and the rate of return is the rate that your mortgage is currently at. You know exactly what that rate of return is going to be. A lot of people find peace of mind knowing that their debt is going down and that they’re reducing their mortgage.
On the other hand, if you’re looking to save and invest, the potential for growth can be higher. You may get a higher rate of return than if you’re repaying your mortgage, depending on where you choose to invest. Also, there may be some available tax breaks or tax reductions depending on where you’re investing that money.
It often comes down to where you are in your life, what your mortgage rate is and what the balance is, and also how much risk you like to take.
General advice warning: the information in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Mortgage rates, investment returns, tax rules and superannuation rules change over time, and the right balance between paying off debt and investing depends on your individual circumstances. Please consider whether this information is appropriate for you before acting on it, and seek personal financial advice where required. Insight Wealth Planning Pty Ltd is a Corporate Authorised Representative of GPS Wealth Ltd, ABN 17 005 482 726, AFSL 254544.