When it comes to managing your finances, the age-old debate between paying off your mortgage faster versus investing your money is often framed as a simple choice. However, a closer look at the numbers reveals a significant difference — one that could put you ahead by more than $269,000.
According to finance expert Ben Nash, the decision between paying down your mortgage or investing could have a major impact on your long-term wealth. Nash’s analysis shows that, for a 30-year-old today, investing just $10 per day could grow to more than $1 million by the time they turn 65, thanks to the power of compound interest.
The Financial Breakdown: Mortgage vs. Investments
To answer the question of which option is more financially beneficial, it’s crucial to compare the return on extra mortgage repayments with the return from investing.
When you make additional payments on your mortgage, you’re effectively saving money by reducing the amount of interest you’ll pay over time. Currently, the average mortgage interest rate in Australia sits at 6.2%. This means that every extra dollar you pay toward your mortgage is like earning a guaranteed return of 6.2%.
On the other hand, investing in the Australian share market offers a long-term average return of 9.8% over the past 30 years. However, the return from shares is taxable, which reduces the effective rate. After factoring in taxes on income (dividends) and capital gains, the effective after-tax return on share market investments is around 7.5%.
Thus, when comparing the two options, the after-tax return on shares (7.5%) slightly outpaces the mortgage rate (6.2%), making investing the more lucrative choice from a purely financial standpoint.
The Numbers: A $269,331 Difference
For a 30-year-old with $500 to invest each week, the difference in returns becomes more evident. If that $500 per week is directed toward paying off the mortgage, it would save the homeowner an impressive $746,050 in interest costs by age 65.
However, if the same $500 is invested in shares, it would grow to an estimated $1,015,381 by the time they reach 65 — a difference of $269,331.
Beyond the Numbers: The Bigger Picture
While the financial returns are compelling, Nash notes that the decision isn’t purely about numbers. Factors such as personal risk tolerance, lifestyle preferences, and financial goals also play a critical role. For some, the peace of mind that comes with owning their home outright may outweigh the potential financial gain from investing.
In the end, the best choice depends on individual circumstances, but from a purely financial perspective, investing tends to offer higher long-term returns.
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