Paying off your mortgage vs investing

When mortgage interest rates are low and you have investment avenues that could earn high returns, you may consider leaving your mortgage alone and focusing on investing your money. You will need to evaluate returns as well as potential risks of various investment options before making your decision.

For example, putting your money into a term deposit should help keep it very safe, but the interest you’ll earn may not compare to the potential returns on some other investment options. You may be able to earn higher returns if you invest in equities, but there’s a risk that the value of your holdings could fall, too.

Spreading your investments across multiple asset classes could help to limit the impact on your finances if any of them depreciate in value, though this is not guaranteed.

As you repay your mortgage principal, you increase your equity in the property. This is how much of your home that you own outright and does not have a mortgage owing on it.

If you need funds in the future, you may have the option of borrowing again against this equity with a home equity loan or a line of credit. You could use this money to renovate your house and possibly increase its value. This could in turn help to further build your equity in the property, while also allowing you to potentially sell the property for more in the future.

Additionally, building equity in your home may allow you to sooner and more easily refinance onto a home loan that better suits your needs, such as one that offers lower interest rates or more flexible features and benefits. And if you have any guarantors for your mortgage, possibly your parents, then refinancing sooner can relieve them from this responsibility sooner.

Any increase in the equity in your primary residence is not taxable. Even if you were to sell the property, you should only be charged capital gains tax on any growth in the property’s value if it is not your primary residence.

On the other hand, the growth and returns on your investments may attract some tax. This may be affected by factors such as your franking credits and concessional capital gains. You’ll need to calculate the impact of both options on your tax before you decide – consider contacting a tax accountant for more advice.

If you’re approaching retirement, you may consider paying off your mortgage while you’re still earning. This may allow you to enjoy a more comfortable retirement lifestyle with the help of your superannuation balance, as you’ll no longer need to put part of your income toward servicing your loan.   

But if you’ll be working for many more years and worry that you don't have sufficient money for your retirement, you could consider investing extra in your super instead of making extra mortgage repayments. You could also consider investing in equity or bonds in the hope of making healthy returns over a longer period.

It’s important to crunch the numbers when thinking about paying off a mortgage vs investing, taking interest costs, returns, taxes, and risks into account. Pay attention to all the fees and expenses you'll need to pay if you invest, as these may reduce your advantage. You may want to consult a financial advisor or mortgage broker to find the option that works for you. 

Finally, this decision is about your state of mind and is a very personal choice. You can choose whether you’d like to be free of the mortgage as soon as possible or whether you can manage the loan and an investment portfolio comfortably.