Should I Pay Off My Mortgage or Invest? (2026 Australia Guide)

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Should I Pay Off My Mortgage or Invest? (2026 Australia Guide)

One of the most common financial questions for Australian homeowners: if you have spare cash, should you put it towards paying off the mortgage faster — or invest it in shares, ETFs, super, or an investment property?

The answer depends on your interest rate, expected investment returns, tax position, and personal risk tolerance. Here is an honest breakdown.

The Core Comparison

Paying off your mortgage delivers a guaranteed, risk-free return equal to your home loan interest rate. If your rate is 6%, paying off $10,000 in mortgage principal saves you $600/year in interest — a risk-free 6% after-tax return on your money.

Investing offers the potential for higher returns — but with risk. Share markets, ETFs, and property can deliver returns above 6% over the long term, but also experience periods of significant negative returns.

The Numbers — Comparing Returns

Home loan rate (as at April 2026): Standard variable ~5.75–6.25%, average ~6.00%

Paying off mortgage (guaranteed):

  • Return: Your home loan rate (e.g., 6.00%)
  • Tax on return: None — interest savings are not taxable income
  • After-tax return: 6.00% (guaranteed)

Investing in Australian shares (historical, long-term):

  • Historical total return (ASX 200): ~7–9% per annum (including dividends, over long periods)
  • Tax: Dividends taxed at marginal rate; CGT on gains (50% discount for assets held >12 months)
  • After-tax return: Approximately 5–7% (varies by tax bracket and holding period)
  • Risk: Returns vary significantly year to year

Investing in ETFs (e.g., Vanguard Australian Shares ETF VAS):

  • Similar to above — historical returns track the ASX 200

Extra super contributions (salary sacrifice):

  • Tax rate inside super: 15% contributions tax (vs marginal rate outside super)
  • Long-term super fund returns: Typically 7–9% p.a. (balanced/growth options, long-term average)
  • Access: Cannot access until preservation age (~60)
  • Tax on return: 15% inside super (nil in retirement phase)

Tax: The Critical Factor

Owner-occupied mortgage interest is not deductible — there is no tax benefit to paying interest on your own home. The saving from paying it off is a straight after-tax benefit.

Investment returns are taxable — dividends are taxed at your marginal rate; capital gains at marginal rate less 50% CGT discount (if held >12 months).

For a high-income earner in the 45% marginal tax bracket:

  • Shares returning 8% gross → after-tax return ~5.5% (after dividend tax and CGT)
  • Mortgage at 6% → guaranteed after-tax return of 6.0%
  • At 45% bracket: Paying the mortgage may outperform after-tax share returns

For a lower-income earner in the 19% tax bracket:

  • Shares at 8% gross → after-tax return ~7.2%
  • Mortgage at 6% → guaranteed 6.0%
  • At 19% bracket: Investing is mathematically advantageous

The Super Option

Salary sacrificing extra contributions into superannuation is often the most tax-efficient choice for higher-income earners:

  • Concessional contributions taxed at 15% (vs 45% marginal rate)
  • Long-term returns (balanced to growth) averaging 7–9% p.a.
  • Returns taxed at 15% inside super; nil in retirement phase

Caveat: Super is illiquid — you cannot access it until preservation age (~60). This makes super inappropriate for short-to-medium term financial goals.

For FY2024–25, the concessional contribution cap is $30,000 per year (including employer SGC contributions at 11.5%).

When Paying Off the Mortgage Wins

Prioritising mortgage repayment makes more sense when:

  • Your interest rate is high (6%+) and investment returns after tax are comparable
  • You are in a high tax bracket (37–45%) and investment returns are taxed heavily
  • You have limited risk tolerance — guaranteed return vs uncertain investment return
  • You are approaching retirement and want to reduce debt obligations
  • You have psychological stress from debt — financial wellbeing matters
  • Your loan is on your own home (no tax deduction for interest)

When Investing Wins

Prioritising investment is mathematically more likely to win when:

  • Your mortgage rate is low and expected investment returns (after tax) are materially higher
  • You are in a low tax bracket (income below ~$45,000)
  • You have a long time horizon (10–20+ years) — time allows compounding to work
  • You are salary sacrificing into super (the tax arbitrage is compelling for most earners)
  • The loan is on an investment property (interest is deductible — the “cost” of the debt is lower)

The Hybrid Approach (Common in Practice)

Most Australian financial planning practitioners suggest neither extreme — and instead:

  1. Ensure your mortgage has an offset account → park extra savings there (same benefit as paying down mortgage, but fully liquid)
  2. Max out concessional super contributions up to the cap (high-tax-bracket earners)
  3. Once offset is at a comfortable level, invest additional funds in shares/ETFs
  4. Avoid fully depleting liquidity — maintain 3–6 months of expenses as an accessible buffer

Frequently Asked Questions

Should I invest while I still have a mortgage?

For many Australians, the answer is yes — but structure matters. Long-term investors in growth assets may build more wealth than those who exclusively focus on mortgage repayment. However, this depends on your rate, tax bracket, risk tolerance and time horizon.

Is it better to max out my mortgage offset or invest in a term deposit?

For most borrowers: offset wins over a term deposit because offset saves interest at your loan rate (tax-free), while term deposit interest is taxable at your marginal rate. See Offset Account vs Term Deposit.

What about paying off investment property debt vs investing?

Investment property debt interest is tax deductible — the effective cost of the debt is lower than the nominal rate. In most cases, it makes less sense to aggressively pay down investment debt vs reinvesting the freed capital.

This article provides general information comparing mortgage repayment and investing in Australia. It is not personal financial advice. Individual circumstances vary significantly — tax bracket, risk tolerance, investment time horizon, and specific loan and investment terms all affect the right decision for you. For advice tailored to your situation, speak with a licensed financial adviser. Find one through MoneySmart.