Pay Down Your Mortgage or Invest? How to Decide

Most people who have a home loan would have asked the same question at some stage:

“Should I pay down my mortgage or invest?”

Both options can make sense financially, but the right one for you depends on a few key questions including: your loan’s interest rate, your goals, and your appetite for risk. In this article, we’ve taken a closer look at both sides to help you figure it out.

Making extra mortgage repayments can mean you’ll pay less interest over the life of your loan depending on how your loan is structured, and this could be more beneficial than you might think!

For example, let’s say you’ve got a $500,000 loan and you’re paying a 6.04% interest rate over a 30 year term. If you pay an extra $100 per month over the life of the loan, you’ll save a close to $58,000! However it’s important to note, the outcome will depend on your loan balance, interest rate, repayment structure, timing of extra payments, and any fees or limits that apply to your mortgage.

Some argue paying down your mortgage should be the priority because it’s more of a sure thing because you reduce your debt and save on interest costs. Unlike investing, there’s no market uncertainty or risk when making extra mortgage repayments.

Potentially the most obvious argument of the bunch - paying more than the required minimum mortgage repayment means you’ll pay your mortgage off faster. Paying the extra $100 a month for the life of your mortgage as in the above example, could see you mortgage free 2 years and six months sooner, according to the Sorted Calculator.

For many people, being mortgage-free can provide a greater sense of financial security and more flexibility in their budget.

Life happens. Jobs are lost, cars break down, health can fail. When these unexpected events occur, having less debt can make it easier to weather the storm by reducing your financial vulnerability (especially if you’re mortgage free).

Before directing all spare cash to your mortgage, consider whether you have accessible savings for unexpected costs (cue, the Emergency fund!). Money paid into your home may not be as readily available as cash, depending on your loan structure and lender terms.

If your mortgage rate is high (e.g., above 6%), paying it off early can provide a return equal to the interest saved, which may outperform low-risk investments. Conversely, if your mortgage rate is low (e.g., below 4-5%), investing the extra in the stock market or other assets with historically higher returns (since 1988 the S&P 500 has returned 9.37%) could grow your wealth more over time.

It’s easy to say this in hindsight. There’s no guarantee the market will keep returning at these levels, or that you will make the perfect investment decision.

Because of the cost of housing here in New Zealand it’s easy to have all your eggs in one big house-shaped basket. Investing sensibly using a strategy like core-satellite, is a great way to diversify - so that if the housing market were to take a hit, you’ve got other horses in the race.

Extra mortgage repayments build equity in your home, but it also means your money is tied up in an asset that can be difficult to access quickly. Investments can offer more flexibility, as you are able to sell part of your portfolio if your circumstances or goals change, generally within a few days.

That said, flexibility only helps if you’re not forced to sell when markets are down. Having an emergency fund and avoiding investing money you expect to need in the near future can help you avoid selling your assets at a loss, and give your investments the time they need to do their thing.

• What do you value: certainty or chance of a higher return? When you make extra mortgage repayments you’re guaranteed to save money on interest repayments. Investing is more risky - you could invest $10,000 and lose $500 a year, or make $1,000. The point is, paying off your mortgage is a more certain, conservative option while investing is higher risk, but with potentially higher rewards.
• Consider your goals: start by asking yourself what you’re trying to achieve, then design a plan around that. If you’re saving for retirement, you’ll need a nest egg to fund your lifestyle. If you’re aiming to sell your home and upgrade, paying your mortgage down may make it easier to get finance approved for the next place.
• Prioritise high interest debt: if you’ve got a mortgage with a second tier lender that’s got a high interest rate, or you’ve got personal loans and credit card debt - this should be the priority. That’s because once your interest rate starts to get up above 7% the savings from paying off debt will often exceed investment returns.

• Why not both? If you’re lucky enough to have extra money left over to pay off your mortgage or invest you don’t necessarily have to choose one. You can do a bit of both and adjust each one as your priorities and circumstances change.

If you’ve decided investing is the way to go based on your situation, it’s worth learning a thing or two first. To get started check out our guide on ‘How to start investing’ or browse Kernel’s investment funds and Shares and ETFs.

Kernel Wealth Limited is the manager and issuer of the Kernel KiwiSaver Plan and Kernel Funds Scheme. Product Disclosure Statements for the Kernel KiwiSaver Plan and Kernel Funds Scheme are available at Kernel Wealth | Resources & Documents. Investing involves risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time. The information provided should not be relied upon as investment advice or recommendations and should not be considered specific legal, investment or tax advice.