Should You Pay Off Your Mortgage Early Or Invest? Here’s The Math On What’s Best



Paying off mortgage quickly can help save you thousands of dollars in interest. But before you start chucking money in that direction, you’ll need to consider a few things before deciding whether it’s a smart idea.

We’ll crunch some numbers and discuss whether it makes sense to use your extra cash to pay off mortgage early or to invest instead.

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Apply online to get a free recommendation with real rates and repayments.

How To Pay Off Your Mortgage (in 10 Years or Less)

Is this realistic, and is it possible, given the standard mortgage term is 30 years?

Sure it is.

First, let’s come up with your typical Australian family: two adults and a kid.

You have a $500,000 mortgage on your home with an interest rate of 3% on a 30-year loan term.

  • You earn $100,000

  • Your spouse earns $60,000

  • Together, you pay a combined tax of $36,784 and are left with $123,216 in disposable income, which is $10,268 per month.

Based on your level of income, we can expect total family expenses to be around $5000 per month, not including the mortgage repayments. (We got our numbers from the Australian Bureau of Statistics on Household income and expenditure.)

From our mortgage calculator, you’ll be able to work out the monthly repayment to be $2,108.

Now, let’s crunch the numbers.

Cash FlowAmount
Net income after tax$10,268
Less: Monthly living expenses($5,000)
Less: Mortgage repayment($2,108)
Money leftover for 'extra' repayments$3,160

Transfer the entire $3,160 into your mortgage Redraw or Offset account every month (as Extra repayments), and you’re on your way to paying off your mortgage in 9 years and 1 month, saving over $180,000 interest in the process!

monthly extra repayments

There’s nothing crazy about this.

You could pay off your mortgage even quicker by sticking to a budget plan. Reducing your monthly expenses from $5,000 to $4,000 and increasing your extra repayments by an additional $1,000 will help pay off the loan in 7 and a half years.

Paying off your mortgage is something we recommend, especially if it’s your primary place of residence because you receive no tax deductions from the interest you pay on your owner-occupier mortgage.

Should You Pay Off Your Mortgage Early Or Invest

Why You Shouldn’t Pay Off Your Mortgage

“Pay off your loan quickly!” Or, “Don’t pay off your loan!” Which is it?

While it’s advisable to pay off your owner occupied home loan as fast as possible, the case isn’t quite as clear cut for Investment property loans.

With investment assets, the Australian Tax Office (ATO) will allow you to claim all related expenses as a tax deduction. This includes investment properties and mortgage interest expense.

So if you paid $15,000 in investment interest this year, you’ll be able to claim the full amount against any taxable income you may have, such as your Rental income, Capital gains or your salary if working in Australia.

Right, so how does all this look like with real numbers?

Below is the annual cash flow summary using the example above of a $500,000 mortgage at a 3% interest rate and rental income of $500/week.

annual cash flow summary

You would be making a rental income of $25,480 p.a., and some may think that income tax would be payable. However, the ATO allows you to claim all related expenses as a tax deduction, thereby reducing your taxable income to $1,951 (before tax depreciation).

annual tax position salary

After accounting for all the tax incentives (depreciation and write-offs), you end up in a negatively geared position, i.e. you pay no tax and instead start accumulating ‘tax credits’.

Want your personalised cash flow and tax position analysis? Check out the ultimate investment property analysis tool.

The last point as to why you shouldn’t rush to pay off your investment mortgage is so you’ll have more cash in the piggy and the flexibility that comes with it.

If your investment interest rate is 3.5% and your Australian marginal income tax rate is at 32.5%, then we can calculate your effective rate of savings from you paying down your investment home loan.

By putting $10,000 into your investment mortgage, you may think you are saving 3.5% per year or $350 in interest, but on paper, you are only saving ((1 – 0.325) * 3.5%) = 2.36%, after you account for the loss of tax deduction.

So it’s a question of opportunity cost/trade-off.

If you believe you can make more than 2.36% (after-tax) with your money elsewhere, then you should reconsider paying down your investment mortgage.

One popular strategy is to still opt for Principal and Interest repayments (because P&I rates are about 0.20% lower than I/O rates) while using your Offset account as a place to hold your cash until a better investment opportunity arises.

An important note to make is that paying down the loan (investment or otherwise) carries almost no risk. Whereas if you intend to buy stocks with the expectation of 10-20% return, there’s most certainly risk involved. It’s a good idea to speak to your financial planner to discuss if it’s sensible before making any big decisions.

Summary: Pay Off Mortgage Early or Invest

Paying off your mortgage early can save you a great deal of money in the long run for relatively little risk. Even a small monthly contribution can allow you to own your property sooner.

However, it may not always be the best option if the mortgage relates to an Investment purpose and further thought is required.

Regardless, it’s prudent to have an emergency fund before you put your money toward your home loan. Also, pay down your high-interest debts first (e.g. credit cards, personal loans) before focusing on your mortgage.

Making extra payments, refinancing, or switching your repayment schedule are all strategies you can use to pay off your mortgage early if that is your goal.

Request a call from Australian mortgage specialists today!

Get a free Australian mortgage assessment today.

Apply online to get a free recommendation with real rates and repayments.

Frequently Asked Questions

No, you cannot directly use your income tax to pay off your mortgage in Australia. Your income tax is collected by the Australian Taxation Office (ATO) and used to fund government services like healthcare, education, and infrastructure.

However, there are some things that may be confusing:

  • Tax Refunds: If your tax calculations result in an overpayment to the ATO, you will receive a tax refund. This refund is your own money and can be used for any purpose you choose, including paying off your mortgage. However, it’s important to remember that a refund is essentially getting back money you overpaid, not an additional source of income.
  • Misinformation: There are some scams and misleading marketing campaigns claiming there are schemes allowing you to redirect a portion of your income tax to your mortgage. These are false and should be avoided.
  • Tax Incentives for Other Things: While not directly paying off your mortgage, there are some tax incentives for homeowners in Australia, such as the first home buyer grant and negative gearing.

It’s important to rely on trusted sources like the ATO for accurate information about taxes and mortgage repayments.

Whether it is better to pay off mortgage or invest in Australia depends on your personal financial goals and circumstances:

  • Paying off your mortgage can provide you with the security of owning your home outright and reducing your debt. It can also save you on interest payments in the long run.
  • Investing in Australia can potentially generate additional income and build wealth over time. It’s important to consider factors such as your risk tolerance, investment opportunities, and the potential returns on your investments.

To make an informed decision, speak with one of our expert mortgage advisers, who can provide personalised advice based on your specific situation. They can help you weigh the pros and cons and determine the best course of action.

Paying off your home loan in just 5 years is quite an ambitious goal! It’ll require some careful planning and financial discipline. Here are a few steps that might help you on your journey.

  • Increase Your Repayments: Consider paying more than the minimum required each month. By increasing your repayments, you’ll be able to chip away at your loan balance faster.
  • Make Extra Repayments: Whenever you have some extra cash, like a bonus or tax refund, put it towards your home loan. This can help reduce the principal amount and save you on interest in the long run.
  • Cut Back on Expenses: Take a close look at your budget and see where you can make some cuts. By reducing unnecessary expenses, you’ll have more money to put towards your home loan.
  • Consider Refinancing: If you’re eligible for a lower interest rate, refinancing your loan can help you save on interest and potentially shorten your loan term.
  • Seek Professional Advice: It’s always a good idea to consult with a mortgage adviser who can provide personalised guidance based on your financial situation. They can help you create a tailored plan to pay off your loan in 5 years.

Paying off your home loan in such a short time frame requires dedication and careful financial management. It’s important to assess your own circumstances and determine if this goal is realistic for you.

Here are some effective ways on how to pay off home loan faster/quicker in Australia.

  • Increase Your Repayment Frequency: Instead of monthly payments, switch to fortnightly or bi-weekly payments (half repayments every two weeks). This essentially adds an extra month’s worth of repayments per year, significantly reducing your loan term.
  • Optimise Your Loan Structure: Make lump sum prepayments whenever you have extra cash, refinance your mortgage if interest rates have dropped, and make sure to opt for a shorter loan term initially, even if the monthly payments are higher.
  • Reduce Your Interest Rate: Shop around for a better deal and apply only after improving your credit score to qualify for reduced interest rates.
  • Manage Your Budget Efficiently: Cut unnecessary expenses, look for ways to boost your income, and avoid financial pitfalls such as high borrowing on credit cards and high-interest loans.

Below are some additional strategies that you can consider to pay off home loan faster/quicker.

  • Offset Account: Link an offset account to your mortgage. Any money deposited in the offset account reduces the interest-bearing portion of your loan, effectively accelerating your repayment.
  • Round up Your Repayments: Round up your monthly payments to the nearest $10 or $50. These seemingly small amounts can add up significantly over time.
  • Use Windfalls Wisely: Unexpected income like tax refunds or inheritance can be used to make large lump sum prepayments, significantly decreasing your loan balance.

Remember, choosing the best strategy depends on your individual financial situation, risk tolerance, and goals. Our specialists can advise you on all this.

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