Ask Paul: Should I put money into my mortgage offset or shares?

Dear Paul,

I'm a 40-year-old single mum on about $125,000 a year and own a two-bed unit, with a $450,000 mortgage on an interest rate of 6.1%.

My job is pretty secure and I have a decent amount in super. I have only just started investing in shares and currently have about $10,000 there.

I also have $40,000 in an offset account.

I know no one can tell me what to do, but I'm still confused about whether it's smarter to invest more in shares in the hope of building some wealth over the next 10 years to be able to buy a bigger place or keep that money in offset.

Any tips on making the decision? - Megan

I certainly can give you some solid tips, Megan, but sadly I cannot guarantee investment returns. You are paying about 6% on your mortgage.

If you add to your offset account, you are effectively earning 6% tax-free, and close to risk-free, on your money. Historically this is a very good return.

Growth assets such as shares have, over many centuries, averaged a return of around 10%pa, including capital growth and dividends.

Based on historically accurate information, over the long term it is reasonable to expect around a 3% to 4% higher return on growth investments such as shares over the rate of interest on your mortgage.

The problem, though, is that this logic really only works with a long-term perspective. In the short term, say under three years, you could see your shares falling in value significantly in a market downturn.

The most sensible path is to use history, not as a guarantee, but as our guide.

If you are happy to take a seven-year-plus view, history shows us you have a very good chance of earning in excess of the rate of interest on your mortgage by investing in shares.

But now it is over to you, because the best decision is very much based on your attitude to risk.

Adding to your offset account is a great way to earn a decent tax-free rate.

Shares, while riskier, in particular in the short term, offer the potential for higher returns. Of course, you could take a middle path and add half your savings to your offset account and half to shares.

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