Pay Extra On The Mortgage Or Invest In Shares

This is a question that gets asked quite often: “Should I pay extra on my mortgage, or invest in shares?”

Whilst there is an easy mathematical answer, you first need to know your financial goals and take into account your feelings.

Sounds weird, right? To take into account your feelings when talking money? But it’s actually very important because you want to be able to sleep well at night.

Oh, and you need to make sure that you have spare money. If you have any high interest rate debt such as payday or after pay loans, credit card debt, personal loans or car loans then it makes financial sense to pay those first.

But what if you have a large education debt? HECS/HELP debts do not accrue any interest and are indexed once a year to keep up with the cost of living. Scott Pape, the Barefoot Investor, recommends not paying any extra on a HECS/HELP debt as ‘there are better things to do with your money’.

So, you have no high interest debt and spare money? Read on.

Financial Goals

What are your financial goals? Have a read through these statements and choose the one that suits you best.

a) It’s super important to you to pay off your mortgage AS SOON AS POSSIBLE so that you can sleep better at night.

b) You’d feel better knowing your mortgage was completely paid before retiring.

c) You don’t have much superannuation, or any retirement funding and have no solid plan to prepare for retirement. It looks like you’ll be using the Age Pension to fund your retirement.

d) You’re on track to be financially independent (when your income from investments cover all your expenses) and know you’ll have enough money to continue paying a mortgage after retirement (at whatever age that happens).

e) You are a maths nerd and personal finance is purely about the numbers.

If A, B or C sounds like you, seek independent advice about getting your mortgage paid off in a time frame that makes you feel comfortable. There’s also a great mortgage calculator on the ASIC MoneySmart website.

If you’re a D or E type of person, keep on reading.

Our Big Financial Goal

I’ll share our big financial goal with you for context. Our financial goal is to reach the point of financial independence by 55 years old. This means that work will be optional from 55 years of age and not a necessity. Thus opening up a whole world of opportunities.

Financial independence is defined as when all your lifestyle expenses, including discretionary spending, can be met by investment income.

We expect to still be paying our mortgage at this stage, unless the interest rate changes drastically, but more on that later.

When I first found out that financially independent people still had mortgages – MIND BLOWN.

I mean, how could you retire yet owe money at the same time. Turns out I was thinking about it wrong. Financially independent people have enough money coming in from investment income to cover ALL their expenses, including the mortgage (if they have one).

Our choice of income from investments is via index funds in the share market.

We would be completely okay with still having a mortgage at retirement because we know we’ll have enough money coming in to cover all our expenses as we save and invest at least 50% of our income to ensure this goal.

We are not particularly high income workers. I’m a school teacher and Mr Hack works in a factory. We have been able to have such a high savings rate as we worked hard on reducing our expenses and being mindful consumers. It can be done.

The Maths

If you have no bad debt, have spare cash, have a solid retirement plan, and know your financial goals – then it’s time to do the maths.

Thankfully there’s calculator to make this part oh so easy to do. It does not, however, take into account your emotions or feelings. It’s just numbers. I’ve used the CalcXML Should I Pay Off Debt Or Invest calculator.

Financial theory recommends that if your after-tax return on investments is greater than your after-tax cost of debt then you should invest. Use this calculator to help analyse your situation.


The calculator is simple to use. And can be helpful with comparing any type of debt (good or bad) and debt attached to investments such as a loan on a rental property.

For the purposes of calculating whether to pay extra on your mortgage or invest in shares complete the following sections.

  • Complete the ‘Interest rate on debt’ box (your mortgage interest rate) and ensure the ‘Is the interest rate tax deductible?’ field has ‘No’.
  • Fill in the ‘Before-tax return on investment’ box (your shares or bonds) and select ‘Yes’ for the ‘Is the interest taxable?’
  • If you are unsure what the before-tax return on investment rate is, select the purple question mark and it brings up a chart with the historic rates of return in the USA. Whilst it’s not a perfect match for the Australian experience, it’s a good guide.
  • Input your marginal tax rate. The purple question mark won’t help here as it opens a box showing the American tax rates. If you are unsure about your tax rate go over to the ATO website.
  • When you have finished filling in the boxes press ‘Calculate’.
Rates and assumptions: should I pay extra on the mortgage or invest in shares.

Historic rates of return on investments in the USA

For the purposes of this article, I’ve input the mortgage interest rate at 3%, the before-tax return on investment as 9% (because I’m conservative) and a common Australian taxation bracket of 32.5%.

After pressing calculate, a new window opens with the results.

Pay Extra on the Mortgage or Invest in Shares: The Results

Results based on my input data
The results as a graph

As you can see based on the CalcXML calculator, in this scenario a person would be better off investing that spare cash in shares rather than paying extra on the mortgage.

I took it one step further to find the tipping point using the same scenario for when a person would be financially better off paying more on their mortgage and it was when the mortgage interest rate increased to 6%. You may get a different result depending on your circumstances.

Personally, we when reach our tipping point based on our numbers, we’ll stop investing extra money into shares and throw everything at the mortgage.

Have a go at inputting your own unique data into the calculator and see what results you get. Used as a guide, you may find running data through the calculator to be a worthwhile exercise.

Please scroll on down to the comments box and share your results.

Have you heard of the online broker SelfWealth – it’s who we use and I can highly recommend them. Each buy or sell trade only costs $9.50 – no matter how much you are investing. Here’s a link if you’d like to try them out. The link entitles you to 5 free trades (and we get 5 free trades as well).

Disclaimer: I am not a personal finance advisor. Do your own research and contact a professional as needed.

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