Balancing mortgage extra payment and investment

Deciding whether to invest more or to pay off your mortgage faster is a common financial dilemma. Both options have their own benefits and potential drawbacks, and the right choice often depends on your personal financial situation, risk tolerance, and long-term goals.

Investing vs. Paying Off Mortgage

Investing:
Investing can potentially offer higher returns compared to the interest saved by paying off a mortgage early. For example, if the stock market averages a return of around 7% per year, investing could grow your wealth significantly over time through compound interest. This is particularly relevant if your mortgage interest rate is lower than the average market return.

Paying Off Mortgage:
On the other hand, paying off your mortgage early can provide a guaranteed return equivalent to your mortgage interest rate. With a 6% variable interest rate, every extra dollar you pay towards your mortgage is essentially earning a 6% return by reducing future interest payments. This option also reduces your debt level, which can provide psychological comfort and financial stability.

Factors to Consider

1. Interest Rates: Compare the interest rate of your mortgage with the expected return from investments. If your mortgage rate is high, paying it down might save more money in the long run.

2. Risk Tolerance: Investing typically offers higher returns but comes with greater risk. If market volatility concerns you, paying off your mortgage might be a safer choice.

3. Financial Goals: Consider your long-term financial goals. If you aim to be debt-free or are planning for a significant financial commitment, accelerating mortgage payments might be beneficial.

4. Tax Considerations: In some cases, investment gains might be subject to capital gains tax, whereas the ‘return’ on paying off your mortgage (i.e., interest saved)

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Hi Vijay,

Great question, and a common one.

Whether you choose to invest or pay down the mortgage depends on your priorities and personal goals. Some people choose based on numbers, some based on emotional factors.

I’ve written about this topic a couple of different times on my blog, these articles may help you:

Should you pay off your home or invest: https://strongmoneyaustralia.com/mortgage-vs-...

Mortgage strategies for a debt free retirement: https://strongmoneyaustralia.com/mortgage-str...

Hope they help you decide what’s best for your situation.