INVESTING

Ask Paul: Should we pay off our mortgage or invest in an indexed fund?

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Q. Hi Paul,

My wife and I are 44 and 45, both working full time with a combined income of about $220,000pa.

We have a mortgage with an offset account, which is incurring 0% interest as our savings of about $60,000 are equal to the outstanding mortgage.

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If we put all of our money into the loan we would be mortgage free but also savings free.

We have no other debts and between the two of us we currently have about $300,000 in super.

What is the best thing for us to do for, say, the next two years:

  • pay out the mortgage now;
  • save more first;
  • or leave things as they are and invest in an indexed fund?

A. With interest rates so low, Joe, I would think you are better off investing.

The rule is simple: you must earn more on your investment than the interest you pay on your mortgage.

There are no guarantees with even a well-diversified indexed fund in the short or medium term.

But history shows that over the longer term growth investments such as shares outperform cash returns or the interest rate on a mortgage.

I would not pay out your mortgage in case you buy another home and want to keep your current home as an investment property.

But I do think that investing in an indexed fund with some of your current money in the offset account, or at least adding your savings to it, makes solid long-term sense.

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Paul Clitheroe AM is the founder of Money and serves as the publication's editorial adviser. One of Australia's most trusted personal finance experts, Paul has spent decades helping Australians build wealth, manage debt and make smarter money decisions. He is widely known for host­ing the Money TV program and authoring best-selling personal finance books. Since launching Money in 1999, he has played a leading role in delivering practical, independent financial guidance to Australians. Paul is chair of InvestSMART Financial Services. He was the founding chair of Ecstra Foundation, a national not-for-profit focused on improving financial wellbeing, from 2018 to 2026, and led the Australian Government's Financial Literacy Board and Financial Literacy Australia from 2004 to 2019. In academia, Paul is chair in financial literacy at Macquarie University, where he is also a Professor in the School of Business and Economics. Ask Paul your money question. Due to volume, Paul cannot respond to questions posted in the comments section.
Comments
John Battista
October 10, 2019 10.01am

Hi paul ,I am retired 5mths now and have my super with host plus till last week in the balanced indexed fund and happy with the reurns , but last week went to cash and now not sure weather to leave it there for now or go back to the balanced index fund.

Money team
October 10, 2019 12.11pm

Hi John,

Thank you for your comment. Unfortunately Paul cannot reply to comments. We will pass your question on to him for consideration in the Ask Paul section of Money magazine.

- Money team