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Reduce the home loan or invest?

A common question asked by clients is whether they are better off using surplus funds to pay off their home mortgage or to make an investment.

Generally a client will be better off purchasing an investment if the after tax return of the investment is higher than the savings generated from repaying the housing loan.

Effective rate paid on housing loan*

Marginal Tax Rate (MTR)After-tax investment return required**
49%       (51%)




39%        (61%)



34.5%    (65.5%)




21%        (79%)




0%         (100%)5.0%6.0%


*This is the interest paid on the loan net of fees. It does not take into account the running costs of the home (example; home insurance, land rates, water rates, maintenance costs etc)

**After-tax return assumes interest is calculated daily.

Generally speaking in the current interest rate environment (around 5%):

  • Balanced investors (earn on average 8% over a 10yr period) might consider investing instead of reducing debt if they are on a MTR of <= 34.5%
  • High Growth investors (earn on average 9.5% over a 10yr period) may consider investing instead of reducing debt if they were on a MTR of <=39%

However, it’s important not to consider the numbers at one point in time in isolation. Before we recommend a client invest rather than reduce debt, we always give consideration to:

  • Our client’s goals and objectives: What’s more important to you– reducing debt or growing wealth?
  • Interest Rate changes: We analyse both the current interest rate environment and the future interest rate outlook. As interest rates rise, it will become less attractive to invest.
  • Frequency in interest calculations: How often is the interest on your loan being calculated? This can affect the after-tax return required.
  • Investment Timeframe: Investment markets are inefficient and volatile over the short term.
  • Liquidity & Accessibility: Your need for access to funds in a timely manner can impact the strategy and the investment options.
  • Regular review: It is always important to review any strategy on a regular basis to assess whether it continues to be aligned to you, your goals, the interest rate environment, legislation etc.

Need help deciding if paying off the mortgage or investing is right for you? At ITL Financial Planning we can guide you through the options so that you can make an educated and well-informed decision on which is most appropriate for you. So why not give us a call now.

Written by Sheeren Chuchill (Financial Adviser) 

ITL Financial Planning and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. Any information on this website is general advice only and does not take into account any person's objectives, financial situation or needs. Please consider your own circumstances and consider whether the advice is right for you before making a decision. Always obtain a Product Disclosure Statement (if applicable) to understand the full implications and risks relating to the product and consider the Statement before making any decision about whether to acquire the financial product.