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Pay Off Your Mortgage or Invest: Make the Right “Extra Cash” Choice for You

You’ve found yourself with some extra cash each month, perhaps from a pay rise, a work bonus, or reduced childcare costs. The big question is: what should you do with it? For many Australians, the choice comes down to two options, pay off the mortgage faster or invest for the future.

While both paths can strengthen your financial position, the right approach depends on your goals, tolerance for risk, timeframe, and broader market conditions. Let’s explore how each option works and what you need to consider before deciding where your money can make the biggest impact.

The Case for Paying Down Your Mortgage

There’s comfort in certainty, and for many, that’s what extra mortgage repayments deliver. Every additional dollar paid into your loan provides a guaranteed return by saving interest, effectively earning you the same rate as your mortgage interest.

For example, a Perth couple with a $600,000 mortgage at 6% interest could save over $3,000 a year simply by paying an extra $50 each week. That’s money that would otherwise go to the bank, now compounding in their favour.

Beyond the numbers, the psychological benefits are powerful. Reducing debt can ease financial stress, strengthen a family’s sense of security, and open doors for future flexibility. A smaller loan also improves borrowing capacity for future opportunities, which could include buying an investment property, renovating your home, or funding lifestyle goals like travel or education.

The Case for Investing Instead

On the other side of the ledger is investing, where the potential for higher long-term returns can potentially outpace mortgage savings. Historically, diversified investment portfolios (such as shares, managed funds, or ETFs) have delivered average returns above typical mortgage rates, rewarding those who can handle some market ups and downs.

Compound growth is another key advantage. The earlier you start investing, the more you benefit from returns that build upon themselves over time. For instance, investing that same $50 per week at an average annual return of 7% could grow to more than $75,000 over 15 years, potentially outperforming the savings from extra mortgage repayments.

There can also be valuable tax benefits. Dividends from Australian shares may carry franking credits, while contributing extra to superannuation can provide concessional tax treatment. For investors in higher tax brackets, these incentives can make investing a particularly attractive option.

Factors to Consider When Deciding

Before choosing a direction, it’s important to weigh the key factors that can influence your outcome.

1. Interest Rate vs. Expected Returns
   Compare your mortgage interest rate with the likely after-tax return on your investments. If your mortgage rate is high, reducing debt might be the safer, more efficient use of funds.
2. Risk Tolerance
   Paying down your mortgage offers a risk-free return, while investing involves market fluctuations. If volatility keeps you up at night, prioritising debt reduction may bring greater peace of mind.
3. Time Horizon
   The longer your investment timeframe, the greater your ability to ride out market dips and benefit from compounding growth. Conversely, if you plan to sell or relocate soon, freeing up debt might provide flexibility.
4. Cash Flow and Liquidity
   Mortgage repayments reduce available cash — meaning those funds aren’t easily accessed if unexpected expenses arise. Investments (depending on the asset) can be more liquid, offering easier access if needed.
5. Tax Position
   Consider how tax deductions, capital gains, and potential negative gearing might affect your after-tax outcomes. Seeking advice from a professional can help you assess the full picture and avoid unintended consequences.

Taking a Balanced Approach

Fortunately, it doesn’t have to be one or the other. Many Australians find success through a blended strategy — work to pay off their mortgage and invest at the same time. Doing both in a complimentary manner requires a decision to be made concerning the percentage of your additional cash that will go towards the mortgage or investing. This is determined in large part by your appetite for risk, and a financial adviser can help you optimise this decision.

For example, maintaining an offset account allows you to reduce interest on your mortgage while keeping funds accessible for emergencies or future investments. Alternatively, salary sacrificing into super can help build long-term wealth through tax-effective contributions, while still allowing you to make occasional lump-sum repayments on your loan.

Another approach is to establish an emergency buffer first — typically three to six months of living expenses — and then allocate future surplus cash between mortgage and investment goals. This strategy provides flexibility and peace of mind while still growing wealth for the future.

Ultimately, a balanced approach gives you both the security of debt reduction and the growth potential of investments — helping your money work harder on all fronts.

Looking Ahead – Your Financial Plan

There’s no one-size-fits-all answer to the “pay off mortgage or invest” question. The right choice depends on your individual circumstances — your income, goals, family situation, and appetite for risk. Both strategies have their advantages, and even small, consistent steps in either direction can make a meaningful difference over time.

If you’re unsure which approach suits your lifestyle and long-term goals, professional advice can help you navigate the options with confidence. A financial adviser can review your mortgage, investment portfolio, and tax position to develop a tailored strategy that aligns with your financial future.

Ready to make your money work harder? Contact the Finance team at McKinley Plowman or call (08) 9301 2200 to arrange a conversation with an adviser today.

Please note the information provided within this article is general of nature and is not a personal advice recommendation. Prior to considering strategies discussed in this article we recommend you seek personal financial advice. Please be aware that, without the benefit of financial advice, you may be committing yourself to financial strategies or products that are not appropriate for your overall personal situation, needs and objectives.

written by:

Justin McMillan

Financial Adviser Justin McMillan has been with McKinley Plowman for several years, following our acquisition of his practice Smartwealth. He firmly believes that while financials, investments, and strategies are important in an individual's financial plan, they are simply the vehicles to allow clients to get where they want to be. Justin takes a holistic and rounded approach and focuses on the individual, taking the time to listen and understand what drives and motivates his clients.