Opinion: Pay off your mortgage faster vs. investing | Canstar

These are challenging times for anybody wanting to invest money. Interest rates are on the rise, bank interest is minuscule, the share market is highly volatile, and residential property appear to be in downturn. So, with this in mind, what should you do with your money? Is it better to pay your mortgage down faster or invest? 

Should I invest or pay off my mortgage?

The first thing to remember is that every investment decision has advantages and disadvantages – it’s important to be aware of these when you decide what to do with your money. 

Paying off your mortgage

Whether paying off your mortgage faster could be right for you depends on what type of mortgage you have and your current circumstances.

If you have a mortgage with an offset account then one option is to deposit any surplus funds you have in the offset account. A good offset account should be paying you the same rate as you are being charged on your mortgage, and with some mortgage rates now around 6%, funds placed in an offset account earn you the equivalent of a guaranteed 6% after tax.

If you have a mortgage with a variable rate, but no offset account, an option you could explore is to simply pay any spare funds off the mortgage. When you do this make sure the bank understands it is a repayment in advance which should give you the ability to withdraw it without penalty if you need those funds in the future. By reducing the debt in this way, and keeping up the original repayments, you could save yourself a small fortune in interest.

But if you are 50 or more, and have a mortgage now, you may want to consider being mortgage-free in retirement. You can do this by increasing your repayments to a level where the loan will be paid off when you get to retirement age. Or, another option is to increase your superannuation contributions, potentially boosting your super to the point where you can pay off your mortgage when you retire.

Should you invest your money?

If you can take a long-term view, then I wouldn’t rule out buying shares – but the trouble is most people don’t know where to start. Deciding which shares to invest in can be very tricking and requires a lot of research and analysis. This is why finding the right index fund could be an option.

An index fund is an investment fund which invests in a category of assets, rather than trying to pick individual stocks or assets out of the whole range. It’s a bit like having a bet on every horse in a race. But because you are backing every horse you returns will tend to be lower than if you picked a long shot winner. Two well-known index funds have the ASX codes of VAS and STW. The former invests in the top 300 shares in the Australian share market, the latter invests in the top 200 shares. Given that the top 200 is over 95% of the market, their returns tend to be fairly similar.

Of course, there are many other index funds such as those that track the S&P 500, the Dow Jones Industrial Average, and various specific asset classes such as bonds and gold. I tend to focus on index funds that track the Australian share market, and also pay franked dividends. However, in consultation with your financial adviser you should decide which asset classes are right for you and the best way to invest in them.

The benefits of index funds are that they are low-cost, there are no specific shares to select, and you have immediate liquidity if the index fund is listed on an exchange, like the ASX.

As far as security goes, the index cannot go broke because it simply tracks a basket of assets, but it will perform in line with those assets. Therefore, if you chose an index fund that invested purely in cryptocurrencies, you would expect it to be more volatile than one which invested only in Australian shares.

If possible, anybody investing in shares should take a long-term view and be aware of normal market cycles which can see phases of volatility. However, if you are retired, you may want to consider keeping three to five years of planned expenditure in cash so you’re not unfortunate position of being forced to liquidate shares at the worst possible time.

So, what is best for you?

When deciding where to put your money it is important to consider your own personal circumstances, financial goals and tolerance for risk. Also consider seeking the advice of a professional financial advisor. And, remember that past performance is not an indicator of future performance.

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