Paying off your mortgage early sounds like the dream, right? It's a fantastic goal and makes great financial sense. But it isn't your only option.
Instead you could choose to keep your mortgage going and use any extra cash to invest. This opens up a range of options, from super to investment funds to a new property.
Investing might be riskier, but also means you could grow your wealth as you pay down your home loan debt. The decision ultimately depends not just on your financial goals but on your appetite for risk.
Let's take a look at your options below.
Option 1: Pay off your home loan faster and get out of debt
Reducing your mortgage debt is always a good idea. If you had a $500,000 mortgage over 30 years with a 5.85% interest rate, you'd end up paying $561,894 in interest on top of that.
But what if you were 5 years into the loan and you started paying off an extra $200 a month? Using an extra loan repayments calculator, we can see that paying off the loan faster would see you out of debt 3 years and 3 months early. And you'd pay $63,262.57 less in interest.
The benefits to paying off your mortgage faster are obvious:
You can save more of your hard-earned cash
Being debt-free means less worry about repayments and more financial freedom
Your property is a form of wealth, so the less debt you hold, the more equity you'll have
But not all debt is bad debt. If you're borrowing more money to invest in an asset that produces income, such as an investment property, that's a pretty productive debt.
Buying an investment property rather than paying off your home loan allows you to produce rental income, enjoy investor tax benefits, take advantage of negative gearing and eventually see a capital gain from the sale of the property. In this light, taking on extra debt doesn't seem unreasonable.
How capital growth works
Let's say you buy an investment property valued at $450,000. You rent it out for $350 a week. Assuming you have a 20% deposit ($90,000) you would have to borrow $360,000.
With an investment loan of 3.00% and a 30-year loan term, you are looking at monthly repayments of $1,517. The rental income would cover this completely.
Now let's factor in a conservative 3% annual rise in property prices. Over 10 years, your investment property is now worth $604,762.
This is a simple calculation. It ignores stamp duty and assumes interest rates won't change or there won't be weeks or months with no tenant paying rent. It also doesn't include repair or maintenance costs. But it's a useful example of how property values make investing beneficial.
The risks of investing in property
Property investment is never a certainty (no investment is). Here are some risks to be aware of:
Being a landlord is work. You have legal responsibilities to maintain your investment property so your tenants can live in it.
A property can lose value. There's no guarantee that the property you buy will grow in value year over year. You need to do your research and buy a good property in a good location.
You might not find a tenant. Untenanted periods mean months without rental income and that can make your investment very expensive.
You could over-leverage. By borrowing money to invest, you access a much larger asset than you could otherwise afford (leveraging), which is great if the property increases in value –but if it falls, this leverage means you amplify your losses
Expert insight
"Probably the most important consideration for investors is your cash flow. You can have an enormous amount of equity in your property and you could almost have your property paid off, but if you don't have the available cash flow to fund additional debt then you're going to be putting yourself in harm's way. If, on the other hand, your debt is quite high and your equity is quite small yet you still have an abundance of cash flow, then quite possibly you might be in a position where you can get into property investment much earlier than you think you can."
Brenton Tong
Financial Spectrum managing director
Finder survey: What do Australians of different ages care about most when choosing an investment loan?
Response
75+ yrs
65-74 yrs
55-64 yrs
45-54 yrs
35-44 yrs
25-34 yrs
18-24 yrs
Interest only repayments
2.33%
0.62%
2.34%
1.45%
0.79%
1.43%
Interest rate
3.73%
5.26%
6.76%
5.12%
2.91%
4.29%
Extra repayments
1.24%
0.58%
0.97%
0.97%
2.86%
Offset account
1.24%
0.58%
0.48%
5.71%
The lender
0.62%
0.39%
Fast approval process
0.79%
Ability to split loan
0.39%
0.97%
Other
0.39%
Source: Finder survey by Pure Profile of 1112 Australians, December 2023
Option 3: Invest in the stock market
An investment property is a big commitment. You could invest in the stock market instead. There are many ways to do this, including products like exchange-traded funds (ETFs) that invest across multiple companies and industries, with varying levels of risk.
When considering your share trading options be sure to look at brokerage fees and average returns to better judge the cost and value of what you're investing in.
Did you know?
In 2024, women saw better investment returns than men, on average, 1.7% higher. Women aged 45 to 54 stood out even more, outperforming men in the same age group by nearly 8%.
Putting extra money into your super fund is another smart alternative to paying off your mortgage early. The earlier you add to your retirement savings the more money you accumulate over time. This is because interest compounds over time. Investing $10,000 in your super in your 30s will grow into a lot more money than $10,000 invested in your 50s.
Other options
Mortgage repayments and property investments certainly aren't your only options. Here are some more possibilities for home owners with extra cash on hand:
Put more money into an offset account. If you mortgage has an offset account you can put extra repayments there. It mimics the effect of extra repayments but you can pull the money back out to spend on an investment or anything else. It gives you greater flexibility.
Fractional property investment. Fractional investment lets you buy shares in a property without stumping up a massive deposit.
Cryptocurrencies. The volatile world of cryptocurrencies offers all kinds of investment opportunities. But it certainly isn't for the faint-hearted.
Frequently asked question about paying off your mortgage or invest
So, as we've seen above, there's no right or wrong answer. Getting out of debt is always a good idea, and buying an investment property later in your mortgage is a strong option too.
It all depends on what you can handle. "The decision to invest in another property when you already have a home loan is a pretty big decision because you're taking on more debt," says Financial Spectrum managing director Brenton Tong. Probably the most important consideration of your financial position at the time is your cash flow.
"You can have an enormous amount of equity in your property and you could almost have your property paid off, but if you don't have the available cash flow to fund additional debt then you're going to be putting yourself in harm's way. If, on the other hand, your debt is quite high and your equity is quite small yet you still have an abundance of cash flow, then quite possibly you might be in a position where you can get into property investment much earlier than you think you can."
The bottom line: don't buy an investment property if you don't have the cash flow to cover the repayments and property maintenance. Obviously having a rent-paying tenant reduces the money required, but you need to anticipate higher costs, property damage and periods without a tenant.
If you're on a fixed home loan that adds a whole other calculation into the mix. Fixed home loans generally have restrictions on being able to pay your home loan off early. You will be expected to pay break costs. You can call your lender to find out the break costs or you can work out a rough cost yourself. If it's more than the interest you'll save by ending the loan early, it may not be worth it.
There are a few ways you can work towards paying your home loan off early, depending on your financial situation.
1. Make extra repayments towards your home loan 2. Keep money in your offset account 3. Refinance your home loan to a shorter loan term 4. Make fortnightly repayments instead of monthly 5. Switch to a lower interest rate but keep your repayments the same
Sources
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Editorial Review Board.
Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University.
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I am 61 and my husband 58. I no longer work but my husband still does. we have one property valued at around 380,000
we have 300,000 in bank and have kept a home loan of 100,000
this is offset by money in the bank and the rest of the money is earning interest at 3.6%.
My question is do i pay of the mortgage, we will still have 200,000 in case we need it.
my husband earns 95000 gross per year. and has superannuation. my superannuation is part of that 200,000. what is the equation for it to work for an investment property?. we would be hoping to resell the property in 5 years. how much rent would you need to be getting if you paid 260,000 for a property.
Finder
ShirleyFebruary 24, 2015Finder
Hi Colleen,
Thanks for your question.
Please note that finder.com.au is an online comparison service and is not in a position to be giving financial or investment advice.
Regretfully, this question is beyond the scope of this forum. It is recommended that advice be sought from a financial planner.
Cheers,
Shirley
RAELENEJanuary 8, 2015
My husband and I have recently bought our second investment through a brokerage agency.At the time my husband’s income was treble to what it is now.We also own another investment property which is more than 40 years old, we pay tax on the rental income from this property as is more than the expenses.We are also paying off a mortgage.Would we be better off selling the old property and pay off our mortgage and keep the new investment or not
Finder
MarcJanuary 8, 2015Finder
Hi Raelene,
Thanks for the question.
Contact a trusted financial planner to get an answer to this question which will take into account all of your personal circumstances, including tax and more.
Sorry, I couldn’t be of more help,
Marc.
JDJune 7, 2014
Hello, we currently own our home in FL, with only $25K owing on an equity line of credit. We also owe $12,500 on a bank credit card. Our home is valued at approximately $275K. We live in Australia & pay $1100/month rent. Would it make sense to purchase a home or unit in Australia instead of paying rent each month? We rent our home out in FL about 6 months/year which covers most of our monthly expenses. Thank you
Finder
ShirleyJune 10, 2014Finder
Hi JD,
Thanks for your question.
Please speak to your trusted financial planner to help you with this.
Cheers,
Shirley
TeenaOctober 20, 2013
Currently have two properties, however have lost my job, have rental coming from one property of 1700 and another coming in at 1500 a month, currently paying off both home and investment property, ANZ won’t structure or refinance differently for me, also have a line of credit am up to 50 now, limit is 80, am running out of ideas to save both homes, is there anything I can do apart from selling one, now before it gets worse, or is there a way to keep both going, am on temporary work as of Monday, but need some help fast,,!
Finder
ShirleyOctober 21, 2013Finder
Hi Teena,
Thanks for your comment.
Please see more about mortgage options, otherwise, it may be worthwhile to seek financial counselling.
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I am 61 and my husband 58. I no longer work but my husband still does. we have one property valued at around 380,000
we have 300,000 in bank and have kept a home loan of 100,000
this is offset by money in the bank and the rest of the money is earning interest at 3.6%.
My question is do i pay of the mortgage, we will still have 200,000 in case we need it.
my husband earns 95000 gross per year. and has superannuation. my superannuation is part of that 200,000. what is the equation for it to work for an investment property?. we would be hoping to resell the property in 5 years. how much rent would you need to be getting if you paid 260,000 for a property.
Hi Colleen,
Thanks for your question.
Please note that finder.com.au is an online comparison service and is not in a position to be giving financial or investment advice.
Regretfully, this question is beyond the scope of this forum. It is recommended that advice be sought from a financial planner.
Cheers,
Shirley
My husband and I have recently bought our second investment through a brokerage agency.At the time my husband’s income was treble to what it is now.We also own another investment property which is more than 40 years old, we pay tax on the rental income from this property as is more than the expenses.We are also paying off a mortgage.Would we be better off selling the old property and pay off our mortgage and keep the new investment or not
Hi Raelene,
Thanks for the question.
Contact a trusted financial planner to get an answer to this question which will take into account all of your personal circumstances, including tax and more.
Sorry, I couldn’t be of more help,
Marc.
Hello, we currently own our home in FL, with only $25K owing on an equity line of credit. We also owe $12,500 on a bank credit card. Our home is valued at approximately $275K. We live in Australia & pay $1100/month rent. Would it make sense to purchase a home or unit in Australia instead of paying rent each month? We rent our home out in FL about 6 months/year which covers most of our monthly expenses. Thank you
Hi JD,
Thanks for your question.
Please speak to your trusted financial planner to help you with this.
Cheers,
Shirley
Currently have two properties, however have lost my job, have rental coming from one property of 1700 and another coming in at 1500 a month, currently paying off both home and investment property, ANZ won’t structure or refinance differently for me, also have a line of credit am up to 50 now, limit is 80, am running out of ideas to save both homes, is there anything I can do apart from selling one, now before it gets worse, or is there a way to keep both going, am on temporary work as of Monday, but need some help fast,,!
Hi Teena,
Thanks for your comment.
Please see more about mortgage options, otherwise, it may be worthwhile to seek financial counselling.
Hope this helps,
Shirley