Paying off your mortgage could cost you in the long run

It’s fair to say Australians have an obsession with property – it’s often considered a rite of passage to adulthood to buy our own home.

After that, the next common goal is to pay down the mortgage on that home as quickly as possible. I mean, we don’t want to pay more interest than necessary right? Or do we?

After buying a home, many Australians then turn their sights to paying it off as quickly as they can. But is that really the best move?Credit: Dominic Lorrimer

What you may not realise is that if you focus solely on paying down the mortgage on your own home and ignore other avenues of generating wealth such as investing, you’ll have less choice than you think.

That’s because unless you’re willing to downsize or bring in a boarder – that home isn’t going to generate an income. It’s about understanding your home is an asset. Not an investment.

I want you to consider paying more off your mortgage and investing. You might think once the mortgage is gone, you’ll start investing then. But let me explain why it’s better to start now with a case study. Assume with this example that two couples each bought a house for $950,000 and both have a mortgage of $760,000.

Your home is an asset, not an investment. It’s time to create more choice.

Couple one: Want to be mortgage free in 20 years

The first couple decided what was important to them was to be mortgage free in 20 years rather than 30, so they pay an extra $888 per month onto their mortgage. The result? In 20 years, they’re mortgage free!

At which point they start investing. They put the entire amount they were paying onto the mortgage including the extra $888 into an investment with an 8 per cent return for three years and four months at which point they now have no mortgage and their investment is worth $248,660. Amazing, right?

But before you start cheering, let’s look at couple two who took a different approach.

Couple two: Want to be mortgage free early, but also want to invest

The second couple decided they want to have the safety net of paying more onto their mortgage, but they also understand that they can’t eat their house. So they also choose to invest so they have options.

They decided that instead of paying an extra $888 onto their mortgage each month like the first couple, they would put $500 towards paying extra off the mortgage and invest the remaining $300 into an index fund earning an average of 8 per cent.

At the end of 20 years, when couple one have paid off their home, couple two still have a mortgage of $179,406 which has three years and four months left to pay off. But they have an investment worth $228,540 which means they’re ahead of couple one by $49,134.

But, let’s keep the comparison going. In another three years and four months, couple two will have no mortgage and an investment worth $315,838. This means, at the same point, couple two will have $67,178 more than couple one.

If we decided that both couples were going to stop contributing and let that investment simply grow for another 10 years the difference is amplified further.

The second couple’s investment is now worth over $681,171 and is worth $145,033 more than the first’s total assets and investments. That’s thanks to the snowballing power of compound interest which means small amounts invested over time will beat putting in larger amounts over a shorter period of time.

So, why do we default to paying off our mortgage and then think about investing? There are so many reasons. We’re stressed by our debt, we think investing takes a lot of money, we don’t have time, we don’t have spare cash, or we’re overwhelmed.

All of those are myths. The truth is, share investing is the great equaliser. You don’t need a lot of cash or to understand macro or microeconomics.

Hopefully, I’ve caused you to stop and think differently about how you’re thinking about your mortgage and about investing. Because your home is an asset, not an investment. It’s time to create more choice.

Melissa Browne is an ex-financial adviser, best-selling author and now a financial educator. Check out her resources and courses at www.melissabrowne.com.au and follow her on Instagram at @melbrowne.money

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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