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