According to research by Roy Morgan, 30% of Australian mortgage holders are at risk of ‘mortgage stress’.
The average mortgage interest rate in Australia fell slightly to 5.79% in March 2025, from an average of over 6% the quarter prior. This is considered high, given that mortgage interest rates had previously averaged 4.12% from 2019 until 2024.
Most major banks are now predicting interest rates have peaked, forecasting reductions from mid to late 2025. Regardless of what the future holds, the reality is that most Australian mortgage holders have endured numerous hikes and are now financially stretched.
If that’s the case, perhaps you’re thinking of how best to manage your finances so you’re better set up for the future. If you have the means to do so, should you pay your mortgage down to be mortgage-free sooner? Or should you invest that money in other assets, to potentially achieve returns that could provide a comfortable financial cushion?
In this article, we’ll cover the basics of investing in shares vs. paying down your mortgage, explore the pros and cons and give you all the information to make the best financial decision for you, in the current climate.
Understanding shares and mortgages
Paying down your mortgage and investing will both result in increasing your assets. The main difference is that paying down your mortgage will reduce your debt (borrowing), whereas investing will diversify your overall wealth and income by spreading your assets over shares and property equity.
If you’re lucky and current higher interest rates aren’t putting you under pressure, you might have extra money. Rather than paying off the mortgage quickly as possible, you might want to diversify your wealth across different investments.
Investing in shares
Shares, also known as stocks or equities, represent ownership in a company. Investors buy shares with the expectation of earning returns through capital appreciation and dividends. However, the stock market is not without risks, and understanding these risks is essential before diving into the stock market.
Mortgage payments
Paying down a mortgage involves reducing the outstanding balance on a home loan. This contributes to building home equity and eventually owning the property outright. Mortgage payments are considered a stable and secure method of wealth-building over time.
Defining your personal financial goals
Before deciding whether to invest in shares or pay down your mortgage, it’s essential to define your personal financial goals. Whether your priority is wealth accumulation, homeownership or a combination of both, aligning your decisions with your objectives is key.
There are other factors to consider, such as your lifestyle, risk capacity and, of course, your marginal tax rate.
For example: suppose you are older and still owe a significant debt on your mortgage, the appeal of owning your home outright as soon as possible may be more important for your retirement than earning a better return by investing. It’s really a personal decision. This video covers some of the key considerations.
What to consider when investing in shares
If you’re considering using your savings to invest in shares, instead of paying down your mortgages, there are a few things to consider. We explore the key differences between reducing your mortgage and investing in shares below.
Potential returns from shares
Shares have the potential for high returns, especially over the long-term. Historical data shows that, despite fluctuations, the stock market tends to appreciate over time. Assessing your risk tolerance and investment horizon is essential when considering shares as part of your financial strategy.
Diversification and risk management in share investments
Diversifying your investment portfolio is a strategy we recommend to mitigate risks associated with shares. Spreading investments across different sectors and industries can help balance potential losses in one area with gains in another. Understanding risk management is fundamental for successful share investing. This is why we recommend a mix of bonds, shares and gold in your investment portfolio.
Market trends and analysis
Staying informed about market trends and conducting thorough analysis is crucial for making informed investment decisions. Stockspot builds and manages your sharemarket portfolio for you, so you can get on with enjoying life and not having to worry about picking stocks. Research also shows that picking individual stocks rarely works, which is why, if you’re planning to invest instead of paying down your mortgage, we recommend a diversified ETF portfolio.
What to consider when paying down a mortgage
Reducing debt and increasing equity
Paying down a mortgage is a methodical approach to building wealth through homeownership. Each payment contributes to reducing debt and increasing home equity. This can provide a sense of security and stability over the long term.
Long-term benefits of mortgage payment
While the returns may not be as high as those from successful share investments, paying down a mortgage offers long-term benefits. Owning a home outright can lead to financial freedom, reduced monthly expenses and a valuable asset that can be leveraged in the future.
Interest rates and mortgage strategies
Understanding interest rates and adopting effective mortgage payment strategies is essential. Refinancing, making additional payments or leveraging low-interest rates are tactics that can optimise the mortgage payment process.
For example: if your mortgage comes with an offset account, one option is to keep all your income there. This should pay you around the same rate as your mortgage. However, if you’ve already made good headway paying down your loan, you may still get better returns from investing.
Pros and cons: Investing in shares vs. paying down your mortgage faster
Investing in Shares
Pros:
- Potential for High Returns: Shares have the potential for substantial returns, especially over the long term.
- Diversification Opportunities: Investing in a variety of stocks allows for portfolio diversification, reducing the impact of poor-performing stocks on overall returns.
- Liquidity: Shares are generally more liquid than real estate, providing the flexibility to buy and sell assets quickly.
- Dividend Income: Some shares pay dividends, providing a regular income stream for investors.
Cons:
- Market Volatility: The stock market can be unpredictable, leading to potential losses during periods of volatility.
- Risk of Loss: Investments in shares are subject to market fluctuations, and there’s a risk of losing the invested capital.
- Requires Active Management: Successful share investing often requires regular monitoring and adjustments to the portfolio (rebalancing) based on market conditions, however using a robo-advisor like Stockspot takes care of this for you.
Paying down your mortgage faster
Pros:
- Stable and Secure: Mortgage payments offer a stable and secure method of building wealth over time.
- Reduced Debt: Paying down the mortgage contributes to reducing overall debt, leading to increased financial stability.
- Home Equity: Each payment increases home equity, providing a valuable asset for the future.
- Lower Risk: Compared to the stock market, mortgage payments involve lower financial risk, although the property market can experience periods of booms and crashes.
Cons:
- Lower Returns: The returns from paying down a mortgage are generally lower compared to potential returns from successful share investments.
- Opportunity Cost: Money used for mortgage payments could potentially be invested elsewhere for higher returns.
- Long-Term Commitment: Committing to mortgage payments is a long-term financial obligation that may limit short-term financial flexibility.
- Interest Costs: While paying down the mortgage, the current high-interest costs will still accumulate, impacting the overall cost of homeownership.
I want to invest. How much should my investments earn?
If you’re leaning towards investing, you want to make sure it’s worth it.
Let’s start with an example of a $100,000 mortgage. If interest rates are 6.0%, then you’d pay $6,000 per year in interest.
This means you’d need to find an investment that earns a higher return than 6.0% per year to be better off investing than paying down your mortgage (or adding to an offset account).
Over the past 1 year to 31 March 2025, Stockspot portfolios generated returns for investors ranging from 14.2% (for our moderately conservative portfolio) to 15.1% (for our aggressive growth).
Should I buy a term deposit instead of paying down my mortgage?
The short answer is no. It may seem like the safe option to put the extra money you have into savings or a term deposit, but you’d be worse off compared to paying down your mortgage (or adding to your mortgage offset account).
Term deposits currently pay less than 5%, and this is less than a typical mortgage rate of 6.0%, so you’d be locking in a loss of 1.0% per year. Plus, the interest earned on a term deposit will be taxable income, whereas there is no tax deduction for interest on owner-occupied home loans.
If you want to invest instead of paying down your mortgage (or adding to the offset account), you need to consider investments that can achieve at least the same return as your mortgage interest rate.Investments like Australian shares, international shares and high grade bonds have all exceeded the average mortgage interest rate over the long run. Compare their returns below against the current mortgage interest rate (on average between 5.7% and 7.1% p.a.).
| 1 year | 3 years (p.a.) | 5 years (p.a.) | |
| Australian shares | 2.7% | 5.1% | 12.9% |
| International shares | 7.5% | 8.2% | 12.4% |
| High grade bonds | 4.2% | 2.0% | 1.1% |
Note: after tax, the return on these investments will vary based on the level of franking credits and concessional capital gains as well as your tax position.
Should I invest in shares instead of paying down my mortgage?
You should only consider investing if you have the disposable income available and 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 strategy.
As we always say at Stockspot, the longer you invest, the better your chance of success. Also, because some of these asset classes do well at the same time that others do poorly, it’s a safer strategy to invest in a balanced portfolio with a mix of different assets. A Stockspot diversified investment portfolio of low-cost ETFs has earned 6-9% over the long run and is much less risky than just owning Australian shares.
| Stockspot portfolio returns* | 5 years (p.a.) | 10 years (p.a.) |
| Amethyst (conservative) | 6.1% | 5.6% |
| Sapphire (moderately conservative) | 7.3% | 6.2% |
| Turquoise (balanced) | 8.3% | 6.7% |
| Emerald (growth) | 9.6% | 7.4% |
| Topaz (high growth) | 10.6% | 8.0% |
It’s also important to keep your costs low when you invest as everything you pay in fees eats into your returns. This is particularly pertinent if you also have a mortgage.
Pay off your mortgage or invest? Here’s a checklist
| 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 6.0% p.a. | You need to compare the expected return from investments to the mortgage interest rate. Over the long run a diversified Stockspot portfolio has earned 6-9% p.a. |
| 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 3 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 a significant safety buffer and be ahead on mortgage repayments before considering investing. | Make sure your investments can be easily sold should your circumstances suddenly require you to pay down more of the mortgage. |
| Income certainty | If your 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. |
Making the right choice for you
In the current financial landscape, there is no one-size-fits-all solution. The right choice hinges on personal circumstances, goals and risk tolerance. The choice between investing in shares and paying down a mortgage faster is not a binary decision but a nuanced exploration of financial possibilities.
It’s also crucial to recognise that financial decisions are not static. They evolve with changing circumstances. The optimal choice today might need adjustment in the future. Regular reassessment and professional advice ensure that your financial strategy remains robust and aligned with your aspirations.
