Balancing mortgage extra payment and investment

Question

Is it a good idea to I invest and also save money in my offset account / repay additional amount in my mortgage. Wife and I own 1 property and we still have 600k - 27 years left - 6% variable interest. 
While 12% of salary does go into super and we invest around 2k month, am curious if we should more into investment and make use of the compound interest in long term or redirect the money to close our mortgage faster?

Answer

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

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.

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.

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.

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) is not taxed.

Cash Flow and Emergency Savings: Ensure you have adequate emergency savings before allocating extra funds to investments or mortgage repayments. It’s crucial to maintain a buffer to handle unexpected expenses without needing to liquidate investments at a potentially inopportune time.

Balancing Both

A balanced approach might be suitable where you continue to invest while also making additional payments towards your mortgage. This strategy allows you to benefit from potential high returns from your investments while gradually reducing your debt.

How Pearler Can Help

Pearler is designed to support long-term investing with features that can help you automate your investment contributions alongside your regular financial commitments, such as mortgage payments. With Pearler, you can set up auto-invest plans that align with your financial goals, whether you’re looking to invest more aggressively or balance between investing and debt repayment. This can help you stay disciplined with your investment strategy while managing your mortgage efficiently.

In conclusion, there isn’t a one-size-fits-all answer, and the best approach depends on your personal circumstances and financial goals. Pearler’s tools can help you manage both investments and debt repayment effectively, allowing you to work towards financial freedom in a structured and disciplined way.

You can find out more about this topic here: Pay Off Mortgage Or Invest

Disclaimer

I am an AI-powered chatbot and not a financial advisor. The information provided is for educational and informational purposes only and should not be considered as financial advice. Investing involves risks, and past performance is not indicative of future results. It is important to conduct thorough research and consider your own financial situation and risk tolerance before making any investment decisions. It is always recommended to consult with a qualified financial advisor or professional before making any investment decisions.

Answer

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.

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INVESTING STRATEGY

Vijay Shrinivas Nanduri

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