Strategies to balance debt reduction and future-proof your wealth.
The Age recently highlighted a surprising truth: aggressively paying down your mortgage could cost you wealth over time, especially in Australia’s current high-interest-rate environment. With home loan rates hovering around 5-6% and investment markets historically returning 8-10%, smart financial planning requires balancing debt reduction with growth opportunities. Balancing debt reduction and wealth growth can seem overwhelming but we’re here to break down strategies into achievable steps.
The Opportunity Cost of Overpaying Your Mortgage
It may come as a surprise that focusing solely on paying off your mortgage without balancing this approach with a smart investment strategy may not be the most effective investment in your future. The most recent reports indicate the average Australian mortgage rate is currently 6.24% for fixed rates and 6.93% on a variable home loan (May 2025), while the ASX 200 has delivered 9.3% annual returns over the past decade. Every extra dollar put into your home loan “earns” only your interest rate, whereas invested funds could compound at higher rates.
Key Takeaways:
- 25% mortgage savings vs. 9.3% potential market returns
- Tax benefits: Mortgage interest isn’t deductible (unlike investment loans)
- The power of compounding:
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- Annual Contribution: $10,000
- Annual Return: 9% (average ASX 200 long-term return)
- Time Horizon: 30 years
- Future Value: $1,427,422 (compounded with yearly contributions)
Psychological Security Matters
For many Australians, being mortgage-free provides emotional relief that outweighs potential investment gains. Many people hold a single-minded approach to paying off their mortgage as quickly as possible, which can lead to stress. Stress from debt can impact health and decision-making, placing often unnecessary pressure on people. Seeking sound financial advice from an expert is our best advice to understand your position and find the healthy balance of achieving a debt-free and secure financial future. Providing a healthy perspective to debt vs. investment.
High-Interest Loans (>7%)
If your mortgage rate is significantly above the market average (e.g., 7.5%+), the “guaranteed return” from paying it down competes more closely with investment returns.
Risk Tolerance & Life Stage
- Pre-retirees may prioritise debt freedom over growth.
- Single-income families often prefer stability.
Key Takeaways:
- Test your scenarios against the Government’s MoneySmart Mortgage Calculator.
- Consider splitting extra payments (e.g., 50% to mortgage, 50% to ETFs).
- Refinance first if your rate is uncompetitive. Always balance the pros and cons of refinancing.
How to Balance Mortgage Paydowns and Investing
For many Australians, the choice between aggressively paying off their home loan or investing surplus cash feels like a decision between two extremes. It doesn’t have to be. A hybrid strategy allows you to strike a balance, combining the security of debt reduction with the growth potential of investments. This approach starts by optimising your mortgage (refinancing to competitive rates and leveraging offset accounts), then strategically allocating the remaining funds to high-growth assets, such as ETFs and superannuation. All while maintaining liquidity and flexibility. Below, we outline the key steps to effectively implement this balanced plan.
Investing Strategy Overview
- Optimise Your Mortgage
- Refinance to <6% rates (cutting interest costs)
- Use offset/redraw accounts (earn “mortgage-rate returns” with instant access)
- Invest the Rest for Growth
- ETFs (e.g., ASX:VAS for low-cost diversification)
- Superannuation (tax-advantaged growth via concessional contributions)
- Property (only if comfortable with leverage and illiquidity)
- Sample Allocation
- 40% extra mortgage payments (until LVR <70%)
- 40% ETFs (broad market exposure)
- 20% super (maximise tax benefits)
This method balances risk, liquidity, and tax efficiency, without requiring extreme sacrifice.
- Mortgage optimisation reduces interest paid without locking away cash.
- Investing 40-60%of surplus funds keeps growth potential alive.
- Regular reviews(every 6 months) adapt to rate changes or life events.
Key Risks and Opportunities
As Australian investors and homeowners plan for the year ahead, three critical market forces demand attention: interest rate volatility, property market uncertainties, and persistent inflation. With major banks forecasting further RBA rate cuts by late 2025, potentially easing mortgage stress but squeezing savings yields, the financial landscape remains in flux. CoreLogic’s latest data reveals a patchy property market, where national price growth of 4-7% in 2024 masks regional stagnation and thin rental yields (averaging just 3.5%), leaving investors vulnerable to cash flow pressures. Compounding these challenges, inflation’s stubborn hold at 3.6% continues to erode the real value of “safe” assets, such as term deposits.
Final Thoughts: Your Path to Smarter Wealth Building
The mortgage vs investing debate isn’t about right or wrong choices; it’s about making informed decisions that align with your financial goals and risk tolerance. By understanding the opportunity costs (6-7% mortgage savings vs 9%+ investment returns) and implementing a balanced hybrid strategy, you can work toward both debt freedom and long-term wealth growth.
Whether you prioritise debt reduction, investing, or a mix of both, the key is to start with a plan and review it regularly. Our Firm is here to help every step of the way. Speak to one of our experts today.