Deciding whether to pay off your mortgage or invest can be challenging. Paying off debt offers security and peace of mind, while investing can boost long-term wealth. The right choice depends on your financial goals, risk tolerance, and strategy. Learn how to assess your options and make an informed decision to achieve financial freedom.
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One of the biggest financial decisions you’ll face is whether to pay off your mortgage as quickly as possible or use extra funds to invest and grow your wealth. Both options have their benefits, but which one is the right choice for you?
You might feel more comfortable paying off your mortgage quickly because it’s likely the largest debt you’ll ever take on. It’s understandable—eliminating debt gives you peace of mind and financial security. The thought of being mortgage-free can be incredibly reassuring, especially when you factor in changing interest rates and financial uncertainty.
On the other hand, investing your extra funds could help you build wealth faster. While paying off debt guarantees savings on interest, investing gives you the potential for higher long-term returns through property appreciation, rental income, or other financial assets.
So, how do you decide which approach works best for you? Let’s break it down.
Imagine you’ve purchased a $1 million property with a 5.5% interest rate. Your principal and interest repayments would be approximately $5,678 per month, or $68,136 annually. When you factor in rates, insurance, and other expenses, your total yearly cost could be around $73,000.
If you earn $98,000 per year, your after-tax income is roughly $73,000, which means your entire income could go toward covering your mortgage. This is why some homeowners rely on dual incomes—allowing one income to cover the mortgage while the other covers living expenses and investments. You also need to remember, it is not realistic to do this in every case —you still need money for everyday living, emergencies, and other financial goals. Most homeowners don’t put every spare dollar into extra repayments because they need to maintain financial flexibility.
If you decide to prioritize mortgage repayment, you could use your extra income to make additional repayments. If you are dual income, let’s say you and your partner earn the same income, and one person’s after-tax salary covers the mortgage while the other’s is used for expenses and savings.
After covering essential household expenses (e.g., $350 per week for food, utilities, and transport), you may have around $55,000 per year available. If you put all of that into extra repayments, your total mortgage payment would increase to $10,261 per month, meaning you could pay off a 30-year loan in just 11 years instead of 30.
By the time your loan is fully repaid, if your property grows at an average of 7% per year, it could be worth approximately $2.1 million—completely debt-free.
Alternatively, you could use that $55,000 per year to invest. If your home appreciates by 7% annually, its value would increase by $70,000 per year. You could then extract equity at 90% loan-to-value ratio (LVR) and combine it with your savings, giving you about $125,000—enough for a deposit on an investment property worth $450,000.
If this investment property also grows at 7% annually, after 11 years, it could be worth $947,000, generating $497,000 in equity. Although you may still have some mortgage debt, your overall net worth would be significantly higher than if you had focused solely on paying off your home.
If you continue reinvesting, acquiring four investment properties over four years and then shifting your focus to mortgage repayment, your investment portfolio could grow to $3.43 million in equity. Even if your home mortgage balance remains at $600,000, your positive cash flow from investments could help you pay it off faster while generating $30,000 to $50,000 in passive income annually.
However, investing isn’t just about numbers—it’s also about lifestyle. You still need to enjoy life, take holidays, save for your children’s education, and have an emergency fund for unexpected costs. A purely aggressive investment strategy might yield higher returns but could leave you feeling financially stretched or stressed in the short term.
The best approach depends on your financial goals, risk tolerance, and long-term strategy.
If you’re not currently in a position to invest, that’s okay. Market conditions change over time, and as lending criteria shift, you may have opportunities in the future. The key is to stay informed, develop a plan, and position yourself for long-term success.
Regardless of your choice, it’s important to be realistic about your finances. You need money for everyday expenses, unexpected costs, and life’s pleasures. The goal isn’t just to build wealth—it’s to achieve financial freedom without feeling like you’re sacrificing everything along the way.
Instead of following the traditional path of paying off your home for 30 years and hoping you have enough to retire, consider how leveraging property investment could help you build wealth while maintaining financial flexibility.
Want to explore your options further? Book a FREE discovery call with the team at Search Property to discuss your next steps!
Disclaimer: Search Property Pty Ltd (SP) does not provide financial or investment advice and does not hold a financial services license as defined in the Corporations Act 2001 (Cth). Any advice given by SP is general in nature and does not take into account your personal circumstances or objectives, financial situation or needs.
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