Ben Nash has broken down the benefits of paying off your mortgage faster vs putting your extra money toward an investment strategy. \u00b7 Ben Nash\/Getty <\/p>\n
It\u2019s the question that divides dinner tables across Australia – if you\u2019ve got some spare cash<\/a>, should you whack it onto your mortgage<\/a> or invest it for the future<\/a>?<\/p>\n It feels like a simple choice, but the truth is more nuanced. The right answer can make you a stack of cash, but it\u2019s also not as straightforward as most people think.<\/p>\n Every extra repayment you make on your mortgage<\/a> gives you a guaranteed, tax free<\/a> return.<\/p>\n 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 \u2014 without the risk.<\/p>\n And then there\u2019s the peace of mind that comes with owing less on your mortgage.<\/p>\n RELATED <\/p>\n A smaller balance means less stress, more flexibility, and potentially even faster progress to financial security<\/a>.<\/p>\n For people that value certainty, this can be an easy win.<\/p>\n If your mortgage keeps you awake at night or you don\u2019t like the ups and downs of investment markets, prioritising extra mortgage repayments is worth seriously considering.<\/p>\n But on the flip side, investing opens the door to higher returns.<\/p>\n The Australian sharemarket had delivered an average annual return of 9.8 per cent over the long term.<\/p>\n 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.<\/p>\n Investing also builds assets that can generate income through dividends or rents.<\/p>\n While paying off your home improves your net worth position, but it doesn\u2019t create another income stream that can replace your work salary<\/a>.<\/p>\n An investment portfolio can.<\/p>\n If you\u2019re comfortable with some risk and have a long term timeframe, investing could compound into even more wealth than simply paying down your mortgage.<\/p>\n This is one area where investing can give an extra advantage.<\/p>\n Mortgage repayments don\u2019t give you any tax breaks<\/a>, and in fact if you\u2019re paying down a mortgage on an investment property, you can actually be eroding your tax benefits.<\/p>\n But investments can deliver you tax benefits, particularly if you\u2019re smart about how you structure them.<\/p>\n Australian shares give you franking tax credits that reduce the tax you pay on your investment and employment income.<\/p>\n Negative gearing<\/a> cuts your tax when you invest into property or shares.<\/p>\n And, concessional super contributions can deliver thousands in tax savings<\/a> when you invest through super.<\/p>\n This all means the effective return on investing can be significantly higher than the headline numbers.<\/p>\n To see the real difference between investing vs mortgage payments, consider this simple example.<\/p>\n 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.<\/p>\n 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.<\/p>\n Once the mortgage is paid off, you could then start investing the money you were putting towards your mortgage, and after 20 years you\u2019d have around $130,000 in investments and be debt free.<\/p>\n 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.<\/p>\n You\u2019d still have a mortgage left of around $206,000, but even after accounting for this you\u2019d still be ahead by around $277,000 compared to the mortgage-first strategy.<\/p>\n But if you look over a longer time period, the gap gets even bigger.<\/p>\n 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.<\/p>\n But with the invest-first strategy, you\u2019d have been steadily investing from day one.<\/p>\n By year 30, your investments would be worth around $2 million, and your mortgage would be fully repaid.<\/p>\n That means you\u2019re $800,000 ahead by saving the exact same amount of money, just allocating it differently.<\/p>\n 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.<\/p>\n This builds your buffer, reduces your risk, and gives you more flexibility if interest rates rise or life throws a curveball.<\/p>\n That peace of mind can be valuable.<\/p>\n But if your mortgage is manageable, i.e. the repayments are comfortable and the interest rate isn\u2019t crushing you, the numbers show that investing usually wins over time.<\/p>\n 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.<\/p>\n And that extra money doesn\u2019t just look good on paper, it creates an income stream that can support the lifestyle you want, long after your mortgage is gone.<\/p>\n The truth is that this decision isn\u2019t as \u2018simple\u2019 as most people make it seem.<\/p>\n The best choice for you depends on your loan, your cash flow, tax position, and comfort with risk.<\/p>\n For many people, the best strategy is a blend of both.<\/p>\n And because the stakes are high, it could be worth getting some quality professional advice to make sure you\u2019re setting yourself up to win.<\/p>\n Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth<\/a>. Ben\u2019s new book, Virgin Millionaire; the step-by-step guide to your first million and beyond is out now on Amazon<\/a> | Audiobook<\/a>.<\/p>\n