- Repaying your mortgage can save you in interest and shave years off your debt
- Investments have potential to deliver higher returns, but carry more risk
- It’s worth considering your unique circumstances and risk tolerance and speak to your accountant, finance adviser and mortgage broker for guidance
You’ve got extra money – perhaps from a bonus, inheritance or just careful saving – and now you’re thinking about what to do with it. Two common options are to pay off your mortgage early or invest the money elsewhere. Both can help build wealth, but the right choice depends on your financial goals and personal circumstances.
Option 1: Repay your mortgage
Paying off your mortgage early can give you peace of mind and reduce your overall interest costs. Every extra dollar you put towards your loan can pay down the principal, which is what the interest is calculated on, or sit in an offset account. This reduces the amount of interest you pay. Over time, that can really add up. Paying down your mortgage also gives you more equity in your home and reduces the length of your loan, which might be important if you’re looking to retire early or reduce your financial stress.
That said, there’s also an opportunity cost. If your mortgage interest rate is lower than the return you could get from investing – say, in an investment property or a portfolio of shares – you might build more wealth by investing instead.
You will need to consider whether your mortgage allows early repayments and whether there are any limitations or fees involved. Your broker can have a closer look at your situation and potentially see if setting up an offset account or refinancing could be a better option.
Option 2: Investing
Investing the extra money has the potential to give you higher long-term returns, especially if markets perform well. It could also help you diversify your financial position beyond your home. But keep in mind, investing carries risk – the value of investments can go up and down, and returns aren’t guaranteed.
Another consideration is tax. Mortgage repayments are made with after-tax dollars, while investment earnings may be taxed depending on the type of investment and your income bracket. Also, if you invest in property, you may be able to claim tax deductions for negative gearing and depreciation.
The verdict: pay off the mortgage or invest?
There’s no one-size-fits-all answer. Paying off the mortgage is more certain in the amount you save, whereas investing has the potential to return higher profits but carries higher risks if the investment underperforms. Some people prefer the security of being mortgage-free, while others are comfortable with more risk and prefer to invest.
If you are close to retirement or paying a high interest rate on your mortgage, you may consider paying off the mortgage to be more suitable for your situation. If you are comfortable with more risk and have a long-term strategy, investing may be an option you consider.
Not sure which is right for you?
If you’re weighing up your options, it is a good idea to speak to your accountant about any tax implications or financial adviser. Your Loan Market broker can talk you through your options when it comes to your mortgage and help you crunch the numbers of paying off your mortgage sooner.
Talk to your broker before making a decision to understand the costs involved and whether the loan is right for you.
