As interest rates continue to rise, many borrowers are now pondering over the question of whether they should direct their investment dollars towards paying down their mortgage or invest in other options like their share portfolio. The recent hike in the cash rate by the Reserve Bank of Australia has resulted in the average outstanding variable home loan rate to reach 5.74%, a figure which could rise even higher if market expectations are met.
With soaring inflation also eating into households’ real wages, the case for making extra mortgage payments has become increasingly compelling. Drew Meredith, Managing Director of financial planning firm Wattle Partners, believes that making additional contributions to a home loan generates a guaranteed and risk-free return. Scott Keeley, Senior Financial Advisor with Wakefield Partners, agrees with this viewpoint, but suggests that investors should still consider investing in shares where dividend yields are high enough.
However, it is important to consider the opportunity cost of missing out on compound interest. Recent analysis by Morningstar shows that paying more into an offset account can reduce the total amount of interest paid over the life of the loan, but the effects of compounding can yield stronger returns on a share portfolio in the long term.
With data from the Australian Bureau of Statistics indicating that mortgage interest costs for employee households have jumped 26.6% over the December quarter, it’s clear that household balance sheets are being affected by the increase in interest rates and the cost of living. With the RBA Governor Philip Lowe indicating that further interest rate increases are on the horizon, it’s crucial for households to consider their options and make informed decisions that align with their financial goals.
Ultimately, the best strategy is to prioritize paying down debt while still investing in wealth-building opportunities that align with your goals and sleep patterns. If you’re constantly thinking about debt before bed, it’s best to prioritize paying down the mortgage, but if you’re focused on building wealth, consider investing in shares or other investments that offer yields similar to mortgage rates. With the right financial planning and investment strategy, you can both pay down debt and build wealth over the long term.
