Should you pay off your mortgage or invest?

Now interest rates are at record lows, and share returns are booming, should you pay off your mortgage or invest? If your mortgage rate is 2.5%, you may be tempted instead to invest in the share market with a chance of a higher return. But, what’s best?

Unfortunately there’s no simple answer. You’re probably familiar with the phrase “it depends on your personal situation”, and in this instance, that’s definitely true. Getting personalised advice is always recommended.

But, don’t panic. We’ve spoken to the experts and have some key points to help you decide what’s best for you.

Pay off your mortgage

Most financial advisers would say it’s always best to pay down debt on your family home first.

“Investment theory says you shouldn’t invest when you’ve got debt against your own home, as your return on the investment would need to be greater than the interest rate on the debt,” says Simon Hepple, a wealth adviser with Pie Funds.

Meaning, if your mortgage rate was 2.5%, the return on your investment return (after tax and fees) would need to be higher than 2.5%. Quite a bit higher, to compensate you for the risk you are taking in the markets versus simply reducing your debt. (Reducing your debt has no risk and reduces the amount of time before you pay it off, bringing forward when you can spend, save, or invest the money you currently spend on the repayments).

The other key reasons in support of paying off your mortgage are:

  • Guaranteed returns: By paying off your mortgage, you’re guaranteed a rate of return (because reducing debt of 2.5% is the same as investing money for a 2.5% return. Plus you can use the money previously spent on repayments, for something else, which is another kind of return). Unlike share or property investments, where returns will vary.
  • Interest rates will rise: Interest rates are low now, but they will likely go up again at some point. So make hay while the sun shines - make the most of low interest rates by paying off your mortgage, including extra payments. Then your mortgage will be smaller when the rates increase.
  • You’ll build equity: The more you pay off your mortgage, the more equity you’ll likely build in your home. This means you can then use this equity for other things if you wanted, like an investment property or share portfolio for example. It also means you keep more of the proceeds if you sell. More equity in your home gives you options.
  • Shares could go down: To get a chance of a return higher than your mortgage rate, you’ll have to take on some additional risk. This means investing in a higher-risk fund, with more shares in it, or shares directly yourself (so you choose and buy the companies’ shares). But share market returns are never guaranteed, and sometimes markets can be down for years. “Share markets will turn,” says Hepple, referring to the current share market boom period. “When interest rates drop, all returns reduce eventually, including shares and property. It is entirely possible we could see a new environment where we see shares only go up a little more than existing mortgage rates over the next few years. You can’t continue to have long-term double digit returns when interest rates are this low - it’s too much of a misalignment.”
  • Don’t get caught up in the hype: Direct shares are a popular investment, due to recent good returns and new platforms making it easy to invest. Most Kiwis will buy and hold shares, which is a long-term investment, rather than trading regularly. All shares come with risk.

Some other things to think about are:

Your time frame: Shares and higher risk funds are recommended for a minimum of an eight-year investment time period. This allows you to weather a period of share market underperformance.

Shares are higher risk: You want to avoid having to sell shares during a downturn, like the recent Covid dip. You could be selling at a loss. But the Covid dip was only short. During the Global Financial Crisis, markets took years to recover to where they were before the crash. Could you cope?

You may want to invest: If you have a very high tolerance for risk, you may want to invest instead. Or, if you have a very high income, or your mortgage is tax deductible (on an investment property for example).

Are you close to retirement? You’ll likely want a mortgage-free home in retirement as you may not have much of an income to support debt servicing without one.

Your KiwiSaver account: If you’re in KiwiSaver, you’re already investing.

Published 16 September 2020

Simon Hepple is a wealth adviser for Pie Funds. Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement. To access Simon’s Primary Disclosure Statement free of charge, visit Any advice is general in nature only and does not take into account any particular person’s financial objectives, goals or circumstances. If you would like some tailored advice, we recommend you see a financial adviser. All content is correct at time of publication date, unless otherwise indicated.