Pay off Home Loan or Invest?

With interest rates trending down, I am regularly being asked whether it’s better to buy shares or to focus on paying off the mortgage. The following email is typical.

 “You have often written that the optimum repayment on a housing loan is $900 per month for every $100000 of mortgage. I am trying to figure out is paying my mortgage better than buying shares. I was thinking about investing in an index fund. “

It’s a fine balance. To become wealthy, you need to get as many growth assets under your control as you can afford. But you need to get the mortgage under control first, so you have a safety buffer if rates start to rise, or if you suffer a financial setback.

Because of the way the numbers work, once you have the mortgage down to a 10 year term there is little to be gained in interest savings by making extra payments. This is why I recommend repayments at the rate of $900 per hundred thousand dollars of loan per month. Provided rates stay between 4% and 5% this will have the loan paid back in around 10 years with minimal interest.

I support the strategy of investing in an index fund that matches the Australian share market.– they have returned between 8% per annum and 9% per annum over the long term with a high level of franking.

If you wish to model a theoretical sum just go to my website and have a play with the two stock market calculators. They enable you to invest a notional lump sum, or a regular monthly sum, on any date you choose from January 1980 until now, and work out what you would have if that money was invested in the All Ordinaries accumulation index which includes income and growth.

Just remember to have a five year time frame in mind when investing in growth investments.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance.