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For many Australians, deciding whether to focus on building wealth or paying off the mortgage is a major financial crossroad. With uncertainty around interest rates, inflationary pressures, and a mixed economic outlook, the question has become even more relevant in 2025. Should you channel extra funds into your home loan, or invest elsewhere to build your financial future?
Let’s explore the pros and cons of each strategy and how to decide what’s right for you.
The case for paying off your mortgage
Paying down your mortgage faster offers several clear benefits:
1. Peace of mind
For most people, the mortgage is the largest debt they’ll ever take on. Reducing or eliminating it can provide a strong sense of financial security. Many Australians value the “sleep at night” factor, knowing they own their home outright and are free from the burden of monthly repayments. In times of job insecurity, owning your own home is an invaluable asset.
2. Interest savings
The faster you pay off your mortgage, the less interest you’ll pay over time. For example, paying off a $400,000 loan at 5.6% interest over 15 years instead of 30 years could save you over $234,000 in interest. And this money can then be allocated to building wealth later.
3. Increased equity
Extra repayments build equity in your home, which can be leveraged later for renovations, debt recycling, investment properties, or other financial goals.
4. Lifestyle flexibility
Being mortgage-free can open up lifestyle choices. With no repayments, your income is freed up for travel, savings, or other investments. However, there are some limitations.
Mortgage repayments are made with after-tax income, which may not be as tax efficient as other investment options. Additionally, some home loans, such as fixed-rate loans, can have restrictions on how much extra you can repay each year.
The case for building wealth through investing
On the other hand, investing your surplus funds, whether in shares, property, managed funds or superannuation, can potentially yield higher returns over the long term.
1. Higher potential returns
Over time, diversified investment portfolios, such as balanced or growth funds and diversified ETFs, have typically produced average annual returns in the range of 7–10%. This performance often surpasses the financial benefit of extra mortgage repayments, particularly in environments with relatively low interest rates.
2. Tax efficiency
Investing in superannuation, for example, allows concessional (pre-tax) contributions taxed at just 15%, compared to your marginal tax rate which could be as high as 45% (plus Medicare levy).
3. Compound growth
Investments benefit from compounding returns. The earlier you start, the more time your money has to grow.
4. Diversification
By investing outside your home, you’re not putting all your financial eggs in one basket. This can reduce risk and improve long-term financial resilience.
That said, investing comes with its own risks, market volatility, potential losses, and the need for a longer time horizon. It also requires a level of financial literacy and comfort with uncertainty.
Finding the right balance
The good news is you don’t necessarily have to choose one path over the other. A balanced approach may be the most effective strategy for many Australians.
1. Split strategy
You might choose to make extra mortgage repayments while also investing a portion of your funds. This allows you to reduce debt while still participating in market growth.
2. Offset accounts
Using a mortgage offset account can be a smart middle ground. Your savings reduce the interest charged on your loan, while remaining accessible for future investment opportunities.
3. Super contributions
Consider boosting your superannuation with concessional contributions. This not only builds retirement wealth but also offers tax advantages.
4. Review regularly
Your financial situation will evolve. What works today may not be ideal in five years. Regular reviews with a financial adviser can help you adjust your strategy as needed.
Key considerations before deciding
Before choosing a path, ask yourself:
- What is my risk tolerance? If you’re risk-averse, paying off debt may be more appealing.
- What are my financial goals? Are you aiming for early retirement, property investment, or financial freedom?
- What is my current mortgage interest rate? Higher rates may make debt repayment more attractive.
- Do I have an emergency fund? Ensure you have a safety net before committing funds to long-term investments.
- Am I maximising tax benefits? Consider how your strategy aligns with tax efficiency.
Final thoughts
There’s no one-size-fits-all answer to the question of whether to build wealth or pay off your mortgage. Both strategies have merit, and the best choice depends on your personal goals, financial situation, and comfort with risk.
In 2025, with ongoing uncertainty around interest rates and the broader economy, Australians are wise to carefully weigh their options. Whether you choose to invest, contribute more to super, pay down debt, or do a bit of everything, the key is to make informed decisions that align with your long-term financial wellbeing.
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The Money & Life website is operated by the Financial Advice Association (FAAA). The views expressed in this article are those of the author and not those of the FAAA. The FAAA does not endorse or otherwise assume responsibility for any financial product advice which may be contained in the article. Nor does it endorse or assume responsibility for the information.
