Should I pay off my mortgage before I start investing

Posted on Thursday, May 22 2014

Should I pay off my mortgage before I start investing?

This is a highly debated topic in the financial community, with some people for the idea and others against it. I personally think it depends. That’s not an overly helpful answer so let’s look at why…. From a purely financial or technical perspective you are usually better off paying your mortgage off before you start a savings or investment programme. This is because you pay your mortgage with money you earn after tax. Therefore being better off financially by investing you need to earn a return of approximately 10-12% gross per annum (about 7-8% after tax) depending on your personal tax rate. There are not many investments that will produce this level of return unless you take on a reasonable amount of risk and/or know what you are doing.

However, the reality is we are dealing with human psychology. This basically means that we are dealing with emotion, desire, discipline and other life factors. A good comparison is when we look at health. We all know that to loose weight that it’s a simple formula of eating less calories than we expend in energy yet many people find it hard to do. Its not because we don’t know what we should be doing, its more that we are more attracted to pleasure than pain and therefore its much easier for us not to do what maybe we should be doing.

People rarely do anything for purely financial reasons. I typically find that people will pay off their mortgages in the same time frame regardless of whether they are putting money aside for investment or not. In most cases I would recommend that, if you can afford it, pay off your mortgage faster than the standard 25 year term, and also contribute to a regular savings or investment plan. One of the positives about starting an investment plan while you still have a mortgage is that you start to get into the habit of savings, which is a great discipline to have to help you achieve your financial goals.

One of the concerns I have about waiting until you have paid the mortgage off, is that we Kiwis have a habit of trading up our houses as we can afford it. This can mean that we are not paying off our mortgages until much later in life which can mean that we start saving too late.

So in summary, whilst it may be better financially in most cases to pay off your mortgage before you invest, the reality is this is not necessarily the best overall option. Its about what you will do, not what you can do! From a holistic perspective most people are going to be far better off doing both.

By Lisa Dudson

Comments are closed.

Expert's Bio

Lisa Dudson

Lisa has been providing financial guidance in the areas of property, business and financial planning for over 12 years. She is the bestselling author of numerous books, previous Vice President of the Auckland and NZ Property Investors Associations and is one of the most experienced financial educators in NZ. Find Lisa On Google+

  • Company Name:
  • Phone:
  • Website:
  • View all articles by: