Should You Pay Off Your Home Loan First or Invest in Australia?

So you have purchased a home, you’re steadily paying off your mortgage… so what’s the next step? Should you pay off your mortgage as quickly as possible? Or should you consider other investment opportunities outside of your home loan to generate wealth? Many homeowners ponder this question when deciding on a wealth building strategy, and the answer is bound to be different for each person, based on their personal circumstances, risk tolerance and finance objectives. So, let’s explore the benefits and drawbacks of both paying off your mortgage early, and investing in other assets.

Is it smart to pay off your mortgage early?

There are several reasons why people choose to pay off their mortgage as quickly as possible. Below are some of the benefits of choosing this course of action:

1. Pay less interest – making additional mortgage repayments on top of the minimum repayments required will shorten your loan term, which may end up saving you thousands of dollars in interest payments.
2. Debt-free feeling – by paying off your mortgage sooner, you will own your home outright earlier than expected and will no longer have to worry about mortgage repayments. This is likely to provide peace of mind and take a financial load off your shoulders.
3. Maximise equity – if you choose to pay off a large portion of your mortgage early, you can then leverage the equity in your home for other things such as a renovation, holiday or education bills, or to make a down payment on your next property purchase.

It is important to note that depending on the loan you have, there may be restrictions, or fees associated with making extra mortgage repayments.

Are there disadvantages to paying off a mortgage?

Becoming debt free is an appealing concept, however paying off your mortgage quickly may mean missing out on other investment opportunities that could yield high returns. Below are some of the downsides to paying down your loan as quickly as possible:

1. Missed opportunities – choosing to make additional mortgage repayments with your savings may come at the expense of exploring other investment opportunities. Your savings could instead be used to build your wealth through investing in other assets such as shares or investment properties.
2. Illiquidity of property – whilst owning your home outright has many benefits, it is important to bear in mind that property is an illiquid asset and it may take time to convert it to cash if an emergency arises and you suddenly need access to funds. So instead of putting all of your excess savings towards your mortgage, you might like to consider diversifying your financial assets or setting up an ‘emergency savings fund’ to give yourself more options.
3. Rental property tax deductions – if you pay off an investment home loan early, you will no longer be able to claim the interest charged as a tax deduction.
4. Fees – depending on your lender and loan type, there may be fees associated with paying off your loan ahead of schedule.

What are the pros of investing rather than paying off your mortgage?

For those interested in investing their excess savings as opposed to using the funds to make additional mortgage repayments, here are some benefits of this strategy:

1. Spreading risk – investing in a range of financial assets can help to build your wealth, and can also provide you with a level of protection if the property market was to cool dramatically.
2. Tax benefits – if you choose to invest in a rental property, you can claim the interest charged on the home as a tax deduction, and take advantage of negative gearing if the property isn’t producing enough income.
3. Asset liquidity – investments such as shares and bonds are generally easier to sell than a house if you are ever in need of money quickly.
4. Boost your retirement fund – choosing to invest extra money into your superannuation fund as opposed to your mortgage is an option worth considering, as concessional (before tax) super contributions are taxed at a maximum of 15% (unless you exceed the concessional contribution cap or you earn more than $250,000 a year).

What are some important things to consider when it comes to investing?

1. If you decide to purchase an investment property, bear in mind that being a landlord comes with a wide range of responsibilities that take time and effort.
2. Risk – there is a certain level of risk involved with investing. If you invest in the share market for example, the market can be unpredictable and your shares may decline in value for a number of reasons. Generally speaking, the higher the potential gain, the higher the potential risk.
3. Tax considerations – share dividends are subject to income tax, and when you sell investment assets such as an investment property, you will generally be required to pay capital gains tax.

There is a lot to consider when it comes to deciding on a wealth building strategy. Everyone’s financial circumstances, objectives and risk appetites vary, so it is important to make decisions based on your personal situation. If you’d like to learn more about some of the lending options available to you, reach out to one of our MoneyQuest finance specialists.

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