Money Answers: Do I take my friend’s advice to focus on the mortgage?

BusinessDesk investments editor Frances Cook responds to emails from readers each week to answer questions about money. Below, you will find her expert advice. Send your own questions to [email protected].

Hi Frances,

I am a single woman in my early thirties who owns a house. I've recently increased my fortnightly repayments which has cut my loan term by five years. 

Before I bought my house, I was investing into Sharesies. This year, with an increase in my income, I've been thinking of re-starting my investing again. However, talking to a friend, she's told me that it's better to focus on repaying my mortgage faster rather than investing again.

Do you have any thoughts on this matter?

Thank you and I look forward to hearing from you soon,

M

Hi M,

Great to hear from you, and congratulations on already being in such a positive financial position. 

The good thing is, there isn’t really a wrong answer here. Either investing into shares, or paying off the mortgage faster, will both boost your financial position. 

What this comes down to is your own values of what you would like to achieve with your money, and then also a bit of maths vs psychology. 

Advice from friends

I want to start by (politely) disagreeing with your friend. 

It’s excellent that you’re having money conversations with friends and helping each other get ahead. Talking openly about money means we share strategies and help lift each other up. 

But the danger can also be that one person’s experience is taken as a general financial rule, when it’s simply their experience. 

There’s no one way to do well with money. So even if aggressively paying off the mortgage has worked well for your friend, that’s no guarantee that it will work well for you. 

That’s also why I often give multiple options in these columns. 

Much of what works well isn’t just about the numbers. It’s also about your own personality, your goals, your values. The numbers are often the last piece of the puzzle, not the first. 

Mortgage vs shares

Now, that said, on pure numbers, yes, paying off the mortgage is often a good idea. Here’s why. 

That debt is locked in. You have to pay it off each month, otherwise the bank will absolutely let you know about it. 

Once it’s gone you’ve demolished an enormous fixed cost that takes a big burden out of your life. 

Paying off debt early can also be considered an investment in your money. 

Extra payments usually go straight on to the principal, which is the amount you borrowed in the first place. So, each dollar extra that you pay also wipes off roughly a dollar of interest that it also would have cost you over the years (depending on how long you have left on the mortgage). 

That’s why extra payments are so powerful. Each extra dollar is worth far more than that one dollar. 

Mortgage rates at the moment could be around 6%, if you get a good deal. So, you can consider it like an investment, giving you a 6% return on your money.

The sharemarket, on average, gives roughly 7% a year. But then you also need to factor in some taxes, inflation, and fees for whatever platform you’re investing through. 

So it ends up more like 5% per year, in the hand. 

The sharemarket is also not as reliable as debt. A mortgage debt has an amount that you agree to pay it back at, at least for a year or two, depending on how long you fix for. 

Meanwhile, that sharemarket return is an average. Some years, it’ll be negative. A great buying opportunity, sure, but it certainly isn’t making any profit that year. 

Other years, it might make a stonking profit. But you don’t know in advance which one you're getting. 

This is why mortgage usually wins on the numbers. 

Technically, your money is going further, because you can save yourself rich. And it’s a set cost that you’ll have to pay, while the sharemarket is more fickle in the short term. 

But 

Full disclosure, I myself pay extra on the mortgage, but also still invest into shares. 

Why? 

The human factor. 

I’ve talked to many people about their financial situation over the years, and there’s something that comes up over and over again. 

People get so close to finally paying off the mortgage, sometimes quite early, in their 40s or even 30s. 

But they have no desire to stop working, and they look at all the money that will soon be in their hands and they think… well, maybe I’ll actually upgrade the house instead. 

Whether it’s for kids, lifestyle, a pool, or whatever, there is a tendency to actually extend the mortgage in order to have a nicer, bigger, something else, house. 

Which is fine, and if that’s what brings joy to your life, I don’t have a problem with it. 

I also don’t want to make any assumptions about your life goals, but you may at a later stage want a family, and your current house may not be suitable.

The issue is, you’ll have missed all the wealth-building opportunities along the way, and now you’re not mortgage-free either. 

Your own home also won’t create income for you (unless you’re willing to do something like have a boarder). 

Paying off the mortgage takes out a big fixed cost, but you will still need money to eat and do fun things with your life. An investment that creates income will be needed for that, and that’s where shares can be great.

The other issue is that shares take time to build up wealth for you. 

Over a couple of years, who knows what they’ll do. Give them a couple of decades, and they’re a proven strategy to building up wealth, and sending your money to work instead of you. 

They need that time to go to work though. People who try to rush shares investing often end up poorer than they started. 

So, in your 30s, it’s your prime years for investing and letting the results compound. 

Why not both?

Putting everything into the mortgage can work really well, but it can also be risky. I don’t like strategies that see you go all in on one thing. 

This is why, personally, I decided on a split approach. 

I looked at how much I needed to spend on core expenses, then decided how much of the leftover money was going towards future goals. 

Then 50% of that extra went towards the mortgage, and 50% went towards shares. 

There’s no reason why someone else couldn’t do this with a 60-40 split, or 70-30, or whatever worked for their goals. But I do like the split approach, whatever type of split you like the look of. 

It’s giving myself options. Paying off a cost and doing technically the right thing with my money. But also acknowledging that life changes, and at some point in the future, my housing needs might change. 

Or, frankly, that I just feel the urge to treat myself. If I’m still working and earning, then I don’t see why I shouldn’t. 

Meanwhile, I’m also putting money into an income-generating asset, that helps buffer me against life’s nasty surprises like losing my job, or deciding I’d like to travel without needing to eat beans and rice. 

When I talk to people about investing, I warn against putting all your money into one company. 

Sure, it may take off like a rocket ship. Or the whole company could collapse and you’ll lose everything. 

Putting money into a fund, that spreads your investment around 50, 100, 200 companies, is far safer. 

I think that split, diversified approach makes sense for all areas of money. 

Putting all your effort into one area can make sense on paper but be dangerous in reality. 

Personally, I prefer to spread it around. 

Send questions to [email protected] if you want to be featured in the column. Emails should be about 200 words, and we won't publish your name. Unfortunately, Frances is not able to respond to every email received or offer individual financial advice.

Information in this column is general in nature and should not be taken as individual financial advice. Frances Cook and BusinessDesk are not responsible for any loss a reader may suffer.