Pay off the mortgage early or invest? Which is better?

Pay off the mortgage early or invest? Which is better?

Should I pay off the mortgage early or invest and save for retirement? This is one of the most asked questions I get as a financial advisor. Accordingly, it’s also one of the most relevant and crucial questions that need to be answered for each person. The good news for you is that there is a definitive answer depending on what stage of life you’re in.

Paying off the mortgage

We all love seeing the amount of money that we owe to a bank reduce. Being debt free is possibly the number one criteria for someone being able to call themselves financially free.

What are the benefits?

1. In a high interest environment (like we currently have) you’re saving around 5-6%. That means you have effectively guaranteed return on your extra payments of five to 6% (for the average investor that is similar as the 20-year average growth rate.)
2. There is no tax on money saved. For every dollar of interest earned you get taxed at your marginal tax rate. When you make extra payments, whatever you saving on the interest rate is not taxed.
3. You gain more equity. How do you pay off more of your home loan? You get more access to the equity within the home. If you have a redraw or offset account you may be able to pull that money out pretty quickly as cash.

You don’t get access to growth.

Investments can provide something that paying off your loan never can. Compounding growth.

There are two major benefits that you can take advantage of when you invest.

1. Finding the best assets. average rates of return usually reflects the environment and markets at the time. in high interest rate environments where your return on cash is high there needs to be extra incentive for people to invest their money into things like property and stocks. Otherwise, why take the risk, right?
2. Future opportunities. Paying of your debt usually doesn’t result in being able to create long term passive income. Having the right kind of investments that have compounding growth and the ability to create income is unique to things like stocks and property (and their variations)

What should you do?

This is an easy question for most of my clients and the people I work with.

If you are under the age of 55 and you aren’t both paying off your debt and setting aside some money to invest, then you’re absolutely insane.

However, if you’re over the age of 55, what you should be doing becomes a question of how you want to retire. Most people will retire at around 65 to 67 years old. Retiring with debt and no income to pay it off will set an awful tone the beginning of your quieter years.

Where this general advice differs is if there are benefits you can undertake that have extra advantages over and above the average investment rate of return. Such as borrowing extra money to invest, investing using your super and getting incredible tax benefits (see our article on saving tax HERE) and investing in high growth strategies that are likely to outpace the average investment return over time.

What you need to know before you act

Whether you decide to pay off your loan early or you decide to invest, you need to be aware that there may be dire consequences of doing either action that may not come to fruition until years later.

So don’t be silly… don’t put all your eggs in one basket. Spread your money around and get good advice.

So, book a time for a 20 minute chat by clicking the link here so we can work out what is best for you.

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