Should You Pay Down Your Mortgage or Invest?

I often get asked, “Should I focus on paying down my mortgage, or is investing the way to go?” This decision can shape your long-term financial landscape, and the answer depends on your priorities. Do you value debt freedom and peace of mind, or are you focused on building wealth over time through investments?

In today’s high-interest environment, understanding the numbers and comparing potential outcomes can provide clarity on which option may deliver greater long-term value.

What is Your Goal: Security or Growth?

First, let’s think about what’s most important to you. For some, the stability of reducing mortgage debt offers peace of mind. For others, the potential to grow their wealth over time through investment is appealing.

• Debt Freedom: Paying off your mortgage quickly can increase financial stability and reduce the total interest paid.
• Wealth Growth: If you aim to build a more robust financial portfolio, investing could offer returns that outpace mortgage savings. However, it comes with a trade-off: market risks and fluctuations.

Considering these factors can guide you toward a decision aligned with both your financial goals and comfort level.

Diving into the Numbers: Mortgage Repayment vs. Investment

Imagine you have:

• A $500,000 mortgage on a 30-year term, with a 5.8% interest rate.
• Your monthly repayments are approximately $2,918, excluding lender fees.

If you carry this mortgage to full term, you’d pay $550,480 in interest on top of the principal. Now, let’s see what happens if you decide to pay an additional $500 each month:

• Mortgage Paydown: Paying $500 extra each month would allow you to clear your mortgage in approximately 23 years and 3 months. Total interest paid would drop to $428,760—resulting in a savings of $121,720 and shaving nearly seven years off your mortgage.

But what if, instead of increasing your mortgage payment, you invest that $500 each month?

• Investment Growth: Assuming an average 7.5% annual return, your $500 monthly investment would grow to approximately $678,433 over the 30-year period.

Result: By investing, you potentially gain an additional $556,713 compared to the interest saved on your mortgage.

Even with periodic market volatility, long-term investment returns can often outpace savings on mortgage interest.

This example illustrates the wealth-building potential of investing. However, keep in mind that mortgage payments guarantee a return equivalent to the interest rate, whereas investments carry market risks and fluctuations.

Personal Considerations in Your Decision

Choosing between paying down debt and investing isn’t only about numbers—it also involves personal comfort and circumstances. Here are a few additional factors to consider:

• Risk Tolerance: Mortgage paydown is low-risk; investing offers higher returns but comes with volatility. Are you comfortable with market fluctuations?
• Tax Implications: Higher income earners may find investment returns taxed at a higher rate, whereas mortgage interest savings are tax-free.
• Life Stage: A younger person with time on their side may lean toward investing, while those closer to retirement might favor debt reduction for added security.

Review your mortgage

Whether your goal is to pay down your mortgage or invest, reducing your mortgage interest rate can significantly impact your savings.

• Compare rates: Regularly check your home loan terms. Switching to a competitive lender can yield a lower interest rate, resulting in considerable interest savings over time.
• Negotiate with your lender: Some lenders may be open to rate adjustments for long-term customers. This can make a noticeable difference.

Pros and Cons: Mortgage Paydown vs. Investing

To make a fully informed choice, let’s consider the key benefits and drawbacks of each option.

Investing in Shares

• Pros Higher potential returns—historically, stock markets offer returns between 7–10%. Diversification options to spread risk and improve returns. Dividend income provides periodic returns, adding to your cash flow.
• Cons Market volatility can lead to capital loss during downturns. Requires time and active management for optimal returns, though advisors can simplify this process.

Paying Down Your Mortgage

• Pros Provides financial security through debt reduction. Tax-free “return” that’s equivalent to your mortgage interest rate. Lower risk compared to investments in the stock market.
• Cons Generally lower returns than investments over the long term. Limits flexibility by tying up cash in a long-term asset (your home equity).

Making the Choice: What’s Best for You?

Deciding to pay off debt or invest comes down to your risk tolerance and financial goals.

Investment May Be Right for You If:

• You have a higher risk tolerance and don’t mind short-term market fluctuations.
• Your time horizon is long (10+ years), giving you time to weather market cycles.
• You have sufficient emergency savings or an offset account to cover unexpected needs.

Mortgage Paydown May Be Right for You If:

• You prefer guaranteed returns with low risk.
• You have short-term financial goals or anticipate needing cash in the near future.
• Debt freedom is a priority for you, or you are close to retirement.

Can’t Decide? Consider a Balanced Approach

If you’re torn between these two options, why not consider a hybrid approach? For example:

• Allocate 50% of your extra cash flow toward additional mortgage payments.
• Invest the remaining 50% in a diversified portfolio.

This strategy can hedge your bets by helping you build wealth while also reducing debt.

Tips for Investing

If you decide to invest, consider these steps to manage your risk and maximize returns:

1. Maintain a cash buffer: Keep a solid emergency fund for unexpected needs.
2. Use debt recycling strategies: Convert your mortgage to a deductible debt by investing through debt recycling, which can help manage tax obligations.
3. Set realistic expectations: Understand that markets fluctuate, so long-term investment success requires patience and discipline.

The Bottom Line

Whether you choose to invest, pay down your mortgage, or do a bit of both, it’s important to choose a strategy that aligns with your financial goals, risk tolerance, and time horizon. The key is consistency—pick a path and stick to it rather than rotating based on interest rate changes. Staying committed to your plan, through both market ups and downs, is essential to reaching your long-term financial goals.

Remember, financial planning is personal, and there’s no one-size-fits-all answer. If you have questions about optimizing your strategy, I’d be happy to discuss how you can best align your financial actions with your goals.

General advice disclaimer.

The information in this Article is of a general nature and does not take into account your own financial objectives, circumstances or needs. You should consider your own personal situation and requirements before making a decision. If you have concerns or questions, please contact me/us.