Should I pay off my mortgage or invest?

In close to four decades of chatting to people about money, this is without doubt their most common question. The answer has a technical aspect to it and this is simple. But the problem is the emotional part, which is all about our personal attitude to risk, our partner’s attitude to risk and – one of my favourite concepts – the “sleep at night test”.

Technically, investing outside the mortgage is a no-brainer. I seriously hope your mortgage interest rate is 4% or under. If not, shop around and find a better deal.

I am not a fan of paying more into your mortgage than you have to, so put it into an offset account. That way if you change homes and want to keep your current property as an investment, you can redraw the money in your offset account and put it into your new home. This minimises debt on the new home, which is not tax deductible, and maximises it on the old home, which as an investment property has deductible costs.

But back to the main point. To justify investing outside the mortgage, if your loan is costing you 4%, you need to earn more than 4% after fees and taxes to make your decision work. As I look at the returns from shares, super or well-located property, it is pretty clear that over the long term you will do a lot better than 4%. So, technically, you would invest, in preference to paying down your mortgage.

Here I have to say that this is exactly what my wife and I did not do. We paid down our mortgage as fast as we could. This is the emotional bit. I am conservative but my wife is very conservative. Debt just does not suit her. Equally, I was starting my business and we had plenty of risk there. Also we had plans for a family and as our three kids came along we upgraded houses a number of times and needed the money in our offset account for this.

Let’s think about why you would add to your offset account and not pay off the mortgage faster:

You and your partner are conservative and will sleep better with less debt.

Your partner will be really cranky if you invest anywhere but the mortgage.

It is a volatile world and you think around 4% risk free and tax free is a very generous return on your surplus money.

You need access to money to buy your next home, start a business, go on a holiday or buy a car.

You may be planning a family or some time off work or have any number of personal issues.

There is one obvious reason to invest outside the mortgage: over time history shows the returns are higher. But there are about a hundred personal reasons you may not!