Invest or pay off Mortgage then start investing?

Hi Mitchell. This is a fantastic question which so many people grapple with and it’s also hotly debated.

At the end of the day, there is no right answer, and each option has both pros and cons. So it’s very dependent on the priorities of the individual. Here are some things to think about…

— The long term return from shares (10+ yrs) has historically been higher than the average mortgage rate (except for that weird time in history when Paul Keating was PM – not a political comment).

— If you had to choose, would you rather have a larger investment portfolio or have a mortgage-free home?

— How a debt-free home will reduce your ongoing expenses, which you may find to be a great stress reliever.

— A growing investment portfolio could provide growing amounts of passive income, which over time could cover a greater share of your mortgage repayments.

— Having a debt-free home could come with psychological benefits, but on the other hand, this basically ties up a person’s entire net worth into a single asset, giving them no diversification or benefit from other investments.

By the way, I wrote an article about this in much more detail which might help you work through this further if you’re interested: https://strongmoneyaustralia.com/paying-off-y...

Hope that helps, and all the best :)

Dave

A really common question and one that can get confusing.

The short answer of what will be ‘best’ can be answered by comparing the interest cost on your mortgage against the expected return on your investments. For example, if your mortgage interest rate is 4% and you’re considering buying an ETF with a long term return of 8%, this means you should be 4% (8% expected ETF return less 4% mortgage interest) better off over time by investing over your mortgage.

But there’s a little more to it than that.

Paying off your mortgage essentially gives you a guaranteed return at your mortgage interest rate, whereas investment returns are not guaranteed and can vary wildly from year to year. I think Dave’s response here is also spot on, because an important consideration is how you ‘feel’ about debt vs investing. If you’ve got a big mortgage and it’s causing you stress, there is value for you in paying that debt down so you can stress less.

Further, when you pay down your mortgage you also reduce your monthly mortgage repayments, which can free up money for your saving, investing, or spending.

I also covered this in some detail in this video: https://www.tiktok.com/@bentalksmoney/video/7...

Hope it helps.