Why it's more practical to invest than pay off home loans

Low mortgage rates in Australia have made home-loan repayments more comfortable for many homeowners, allowing them the opportunity to grow their money by investing, a market watcher said.

While it is usually better for homeowners to settle their loan first, Stockspot CEO Chris Brycki said investing in the current interest-rate climate could be advantageous, especially to those who have already paid down a large part of their loan.

"A good example is if you have a mortgage of $100,000 and are paying $3,000 per year in interest, you would need to find an investment that earns a higher return than 3% per year to be better off investing than paying down the mortgage," he said in a think piece.

Also read: Is it practical to invest while paying mortgage?

Choosing investment vehicles

Would-be investors must choose investment vehicles that would allow them to achieve at least the same return as their mortgage interest rate, Brycki said.

Australian shares, high-grade bonds, and international stocks are some examples of investment vehicles that managed to outpace the average interest rate over the long run.

"You should only consider investing if you can do it for the long term. The day-to-day share market movements become much less relevant over time, so the decision to invest should be based on a long-term horizon," Brycki said.

Investing in property

Homeowners can also consider using their excess savings to invest in another property. Brycki said property investors can take advantage of the tax benefits of negative gearing.

"It's been a popular strategy in Australia, but it's risky, as it concentrates your assets into one investment class and increases your debt as you're likely to take out another mortgage," he said.

Also read: Would negative gearing changes be a big win for first-home buyers?

However, Brycki said it is also essential to consider other factors such as lifestyle, risk tolerance, and marginal tax rates if homeowners decide to break into property investing. The table below lists some of the considerations Brycki identified:

Factor	Pay down mortgage / Add to offset account	Invest extra savings
Returns	It makes more sense to consider investing when mortgage interest rates are lower. Currently owner-occupied mortgage rates are around 3% p.a.	You need to compare the expected return from investments to the mortgage interest rate.
Tax	Is your interest tax deductible? This is based on whether it’s your primary residence or an investment property.	The after-tax return from investments will vary based on the level of franking credits and concessional capital gains as well as your tax position.
Time horizon	It’s a safer option to pay down the mortgage if the period remaining on it is less than three years.	The longer you have to pay your mortgage, the more attractive investing becomes. You have a better chance of earning more than the mortgage interest rate from your investments.
Safety buffer	You need to build significant safety buffer and be ahead on mortgage repayments before considering investing.	Make sure investments can be easily sold should your circumstances suddenly require you to pay down more of the mortgage.
Income certainty	If your work income is less certain it makes more sense to pay down your mortgage.	If your work income is stable, investing is more attractive. There’s less risk you’ll need to sell down your portfolio early to meet mortgage repayments.

Are you curious to know how much it really takes to invest in property? Try this free tool from Your Mortgage.