Invest or pay off Mortgage then start investing?

Question

Coming from a family where everyone always said pay off your mortgage asap and be debt free. It is hard to change my mindset to accept the interest for 30 years while I am investing. 
My question is. If I am able to pay off my mortgage relatively quickly (8-10 years). Should I pay that off then invest heavily everything once I am debt free? I guess the current rising interest and worldwide uncertainty is pointing me to pay off mortgage at the moment. Too short sighted?

Answer

Hi Mitchell. This is a fantastic question which so many people grapple with and it’s also hotly debated.

At the end of the day, there is no right answer, and each option has both pros and cons. So it’s very dependent on the priorities of the individual. Here are some things to think about…

— The long term return from shares (10+ yrs) has historically been higher than the average mortgage rate (except for that weird time in history when Paul Keating was PM – not a political comment).

— If you had to choose, would you rather have a larger investment portfolio or have a mortgage-free home?

— How a debt-free home will reduce your ongoing expenses, which you may find to be a great stress reliever.

— A growing investment portfolio could provide growing amounts of passive income, which over time could cover a greater share of your mortgage repayments.

— Having a debt-free home could come with psychological benefits, but on the other hand, this basically ties up a person’s entire net worth into a single asset, giving them no diversification or benefit from other investments.

By the way, I wrote an article about this in much more detail which might help you work through this further if you’re interested: https://strongmoneyaustralia.com/paying-off-y...

Hope that helps, and all the best :)

Dave

Answer

IMO you should consider the cashflow of all the options and assess your risk tolerance around debt:How much is each strategy costing you month to month?What are the expected returns?What are the tax implications? (you pay tax on income but not on interest savings)How comfortable am I with this debt and the potential of rate increases?Options:100% in your mortgage, then investing.Investing 100%, then paying down the mortgage.Doing a mix of both at the same time.100% in both at the same timeThe last one is called debt recycling. Putting 100% in your mortgage and then drawing out the same amount from an investment loan / line of credit separate to your mortgage to invest with. Doing this means you can slowly replace your non deductible debt with deductible debt. You’ll pay of your mortgage faster(with increased income from dividends and tax deductions) and build your investments faster(with leverage). You will not be reducing your debt levels with this strategy, it would be staying the same. So you’d need to be able to keep servicing this loan for the long term.I’d be very interested if anyone had modelling or a spreadsheet showing different scenarios of all these approaches.

Answer

A really common question and one that can get confusing.

The short answer of what will be ‘best’ can be answered by comparing the interest cost on your mortgage against the expected return on your investments. For example, if your mortgage interest rate is 4% and you’re considering buying an ETF with a long term return of 8%, this means you should be 4% (8% expected ETF return less 4% mortgage interest) better off over time by investing over your mortgage.

But there’s a little more to it than that.

Paying off your mortgage essentially gives you a guaranteed return at your mortgage interest rate, whereas investment returns are not guaranteed and can vary wildly from year to year. I think Dave’s response here is also spot on, because an important consideration is how you ‘feel’ about debt vs investing. If you’ve got a big mortgage and it’s causing you stress, there is value for you in paying that debt down so you can stress less.

Further, when you pay down your mortgage you also reduce your monthly mortgage repayments, which can free up money for your saving, investing, or spending.

I also covered this in some detail in this video: https://www.tiktok.com/@bentalksmoney/video/7...

Hope it helps.

Answer

Hi Mitchell, I’ve only started investing since the start of 2022, so I’m definitely no where near qualified to give any advice. I just thought I’d share what I’m doing. I am doing a mix of both paying extra on the mortgage and investing.
Before I started investing, I was on a mission to pay off the mortgage ASAP, with a view to reduce overall interest paid and then start investing once the house was paid off. However after some research I realised by doing this I would loose valuable time &amp; compound interest, especially when interest rates are very low!
I still pay some extra on the mortgage because I like the guaranteed «return on investment» and I don’t like giving banks more of my money than I have to. I figure that while I’m new to investing, it’s probably better to start slow and invest smaller amounts anyway while I’m still learning.
Hope this helps. Good luck with whatever path you choose!

Answer

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Dave Gow - Strong Money Australia

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