What happens when you pay off your mortgage?

Paying off your mortgage is a great achievement. But if you can pay it off, does that mean you should?

And if you do decide to pay off and discharge your loan, what do you do with the extra cash then?

Pros and cons of paying off your mortgage

Accessing cash through redraw

If you haven't finished paying off your home loan yet, but you're close, it may be worth considering holding off. By this point you will have a substantial amount of equity in your property and if you've made additional repayments to get to that point, you may be able to access those extra funds through the loan's redraw facility.

While it might sound counterintuitive to keep your mortgage open, it can be a helpful move for some.

If you know you need a cash injection some time in the near future, using your home loan's redraw facility may work out as a cheaper option than borrowing more money.

How to discharge your mortgage

Once you've paid off your home loan in full, you will need to discharge your mortgage. A discharge is the process of formally removing your lender from your certificate of title. It's an important process to follow and will save you from complications if you ever plan to sell your home.

The first step in discharging your home loan is notifying your lender. It'll provide you a document known as a discharge authority form. Complete and return this form, then register your discharge of mortgage at the land titles office in your state or territory.

Read our step-by-step guide to discharging your mortgage

Where you could invest your money after you discharge your mortgage

Now that you no longer have a home loan repayment hanging over your head, you'll have money freed up for other purposes. You could take a holiday, splurge on something you've always wanted or undertake some renovations. Or, you could invest your money elsewhere and try to grow your wealth.

Here are a few of the asset classes you might consider:

• Shares

  Buying shares allows you to become a part-owner of a company. As shares in a company are traded on the stock market, the price of shares fluctuates up and down. Investing your money in shares involves buying stock in one or more companies. There are 2 main ways to make money from shares:

  • Buying shares when they are priced low and selling them when the share price increases
  • Through regular dividend payments, which are payments companies make to shareholders to allow them to share in the company profits

  Shares can also be referred to as stocks, equities or securities. You can invest in shares traded on the Australian Stock Exchange (ASX) or international shares traded on stock exchanges around the world. There are a variety of ways to invest in shares. You can buy and sell through share trading platforms or through the services of a financial planner or stock broker. You can also invest in a portfolio of stocks through a managed fund or exchange traded fund (ETF).

  Benefits and risks of investing in shares

  • Strong potential for long-term capital gains. It can be possible to make large short-term gains, but it involves taking on a much higher level of risk.
  • Dividends can be used to create a regular source of income, while trading shares from the comfort of your own home.

  • Shares are not guaranteed to turn a profit. Shares in a company can experience dramatic price drops – even to zero.
  • The value of your shares can fluctuate from one day to the next. The dividends you receive can also rise and fall.
  • Investing in shares may only be suited to experienced investors.

• Property

  
  The property market has delivered lucrative returns for many Australian property investors over the years. Investing in property typically involves buying a property at an affordable price and then renting it out to generate rental income. Once the value of the property has risen to a suitable level, the investor can then sell the property for a capital gain.

  There are a variety of ways you can invest in property:

  • You could choose to buy a property to rent out to generate cash flow or you could try to buy and sell for capital gain.
  • You could choose to invest in a real estate investment trust, or REIT. REITs pool investors' money to invest in various properties, and trade as securities on the stock market.
  • There is also a growing trend of investing in real estate through crowdfunding. This burgeoning model allows investors to own a portion of a property or properties, and to make returns based on their fraction of ownership.

  Benefits and risks of investing in property

  • As a general rule, property can be less volatile than shares and some other asset classes. If you do your due diligence and purchase a property in the right location, there's potential for substantial capital growth, while the chance to take advantage of rental income is another bonus.
  • You can choose to live in the property if the need arises.

  • There's a risk that the value of the property goes down, rather than up.
  • You need to consider extra costs such as mortgage repayments, stamp duty and property maintenance fees. Entry costs in particular can be very high.
  • Not possible to sell off part of your property investment if you need access to cash quickly.

• Business

  Another option you might want to consider is investing your money in a business. Rather than investing in shares, which involves buying a small portion of a publicly listed company, this refers to taking ownership of a business and using it to generate wealth.

  Benefits and risks of investing in business

  • If you set up a well-run business in the right industry at the right time, you could enjoy substantial returns.
  • Businesses also give you the chance to pursue your creative pursuits and achieve a level of personal fulfilment that most other investments don't satisfy.

  • Running a business is risky, especially if you've never done it before. There's a risk that the business will go bust.
  • You'll need to be very hands-on when managing your investment and this may take a lot of time and effort.

• Super

  
  Superannuation is a way to save for your retirement. Contributions can be made into your superannuation fund by your employer and topped up by contributions from your own bank account. While these contributions accumulate, your super balance is invested by your super fund into assets such as stocks, property and bonds, to help boost your retirement savings.

  Benefits and risks of investing in super

  • Investing can be a viable way to save for your retirement. Not only can it ensure that you are able to live comfortably once you stop working, but money you put into super is usually taxed at a lower rate than money you put into other investments.

  • While investing in superannuation can lead to a steady growth in retirement savings, it doesn't offer the same potential for large returns that other investment options do.
  • Super is also affected by fluctuations in investment markets, so there's always the risk that you won't achieve the returns you desire.
  • You are unable to withdraw from your superannuation funds if you need the money down the road.

• High interest savings accounts

  
  High interest savings accounts are a simple but effective investment solution. In a nutshell, you make regular contributions to an online savings account and you earn a high rate of interest on your savings balance.

  Benefits and risks of investing in high interest savings accounts

  • High interest savings accounts are easy to establish and maintain.
  • They offer secure and regular investment returns. If you make a habit of regularly putting some of your income towards this type of account, your savings will grow.
  • Some accounts also offer a bonus introductory interest rate to help you build a savings balance even quicker.

  • Some banks offer interest rates on a tiered balance so higher amounts earn a lower rate of interest.
  • Your return is typically much lower in the long run than if you'd invested in other assets like stocks.
  • The interest rate can fluctuate, unlike a term deposit.

• Term deposits

  
  Similar to a high interest savings account, a term deposit lets you earn a high rate of interest on your savings balance. However, the difference is that the money is invested for a fixed time period, for example a year, and your interest rate is locked in until your term deposit matures.

  Benefits and risks of investing in term deposits

  • The main benefit of a term deposit is that it guarantees steady and secure returns. While there may be opportunities to grow your wealth more substantially elsewhere, term deposits offer a safe and reliable investment solution.
  • If interest rates are high at any particular time, you can lock in a rate before they start to drop.

  • On the other hand, term deposits don't allow you to access your funds until the account matures – so if you have a cash flow problem, your money will be locked away.
  • The other main risk is that interest rates could rise well before your deposit matures, meaning your money won't be working as hard as it could be.

• Managed funds and ETFs

  
  A managed fund lets you combine your money with other investors. The resulting funds are then used to buy and sell shares and other assets by an investment manager, and you periodically receive income or distributions from your investment. Another option is to buy and sell exchange-traded funds (ETFs) on a stock market like the ASX. You could also invest in an index fund ETF or managed fund. This is a type of managed fund that is constructed to track a component of the ASX.

  Benefits and risks of investing in managed funds

  • Managed funds give you the security of having a professional manage your investments.
  • They also allow you to diversify your investments across a broad range of assets.

  • Handing over control of your investment can be a downside.
  • A high minimum investment may apply. Some managed funds require a minimum investment of $10,000 to $20,000 or more.

How to choose the right investment option

The right investment plan for you completely depends on your own situation and what your overall aim is.

Here are some questions to ask yourself:

• Are you looking to grow your wealth substantially in the next 5–10 years?
• Do you want to start steadily and securely putting away money for retirement?
• Do you want to be able to set your family up financially?
• How much risk are you willing to take on?
• Are you happy to borrow more money to fund the investment or would you rather pay for it out of your own pocket?
• How much money do you have available to invest comfortably?

Traps to avoid when investing

While we’ve explored some of the specific risks associated with each investment option above, there are a few more general risks you should be wary of. These include:

• Taking on more debt. If you’ve just paid off your mortgage and you're thinking of taking out another loan, ask yourself if you really want to tie yourself down to another debt. The financial and emotional stress of keeping up with repayments can wear you down, so you might be better off avoiding borrowing more money.
• Getting into trouble. Depending on your circumstances, you don’t want to take on too much investment risk. You’re obviously going to be much closer to retirement than you were when you first took out a mortgage, so consider the potential consequences for your finances if your new investment plans go belly-up.
• Putting the house at risk. You’ve worked for years to pay off your house and make it your own, so think very, very carefully about any investment options that might put your home at risk.
• Expecting a silver bullet. Remember that there are no guaranteed pathways to instant wealth no matter which option you choose. If an investment sounds too good to be true, it probably is.
• Not being prepared. Don't invest more than you can afford to lose and make sure you have an emergency cash fund set up before investing in any risky assets (like anything that is not a cash savings account).