Ask Paul: Should we pay off our home or invest in property?

With a $670,000 mortgage and major renovation plans, Sothea and Josh are weighing up a classic wealth-building dilemma: pay off the home loan first or start investing in property and shares?

Reader question

Hello, Paul, my husband and I have been avid readers of your column since 2023.

Your insights are invaluable to us, and we are hoping for your guidance on how to best structure our finances to enjoy a comfortable lifestyle now while securing our future retirement. We are both in our mid-40s.

Our current position

• Property: Purchased our home in 2023 for $1.8 million with a current mortgage of $670,000.
• Mortgage strategy: We use a redraw facility. All our income is paid into the loan, and we redraw funds as needed for daily expenses and holidays.
• Income: Combined annual income of $310,000 (Josh: $200,000; me: $110,000).
• We both receive 17% super contributions. My husband has about $335,000 and I have about $100,000, both on defined benefit schemes.
• Family: Two children in primary school.
• No other debts: We usually go on an overseas trip once every one to two years.

Upcoming capital expenditure

We have significant renovations planned to improve our home:

• 2026: Window replacements ($43,000 deposit already paid).
• 2027: Ensuite addition, plus bathroom and laundry updates (approximately $100,000).
• Future: Landscaping, fencing and a pergola (approximately $100,000).

The dilemma

We currently pay approximately $87,000 in annual income tax. While we've noted your previous advice regarding paying off a primary mortgage before investing, our high tax burden is making us reconsider.

Given our high marginal tax rates, would you still suggest prioritising the mortgage and renovations over acquiring an investment property or shares? Especially considering the changing legislative landscape around negative gearing benefits.

This brings us to a couple of areas where my husband and I don't quite see eye-to-eye:

• Investing vs the home: I have a strong interest in real estate, but my husband does not. He believes our retirement security lies entirely in paying off our family home. I feel that a home isn't a complete retirement plan and that we are missing out on our potential to build wealth through outside investments.
• Renovating vs moving: My husband is hesitant about the upcoming renovations, not due to the cost, but because of the living disruption and his belief that they won't add significant resale value. He would prefer to sell and buy a finished home. My view is that we can easily afford the renovations and should do them to enjoy the lifestyle benefits now, especially since buying a new home that ticks all my boxes is outside of our current budget.

Our key questions for you:

Would you suggest shares or an investment property as viable "retirement builders" for us right now, or should we stick to the "mortgage-first" path despite the heavy tax leak?

Down the road, if we can afford it, does it make sense to completely pause our renovation plans now, save the money, and eventually buy a new home while keeping our current home as a rental property?

Or should we forget about investing entirely, focus purely on climbing our respective career ladders to reach the next pay level, and simply use that extra income to pay off our home loan faster? - Sothea and Josh

Paul's response

Thanks for the kind comments, Sothea and Josh. I much enjoy answering Money reader questions and try to provide some guidance in a very volatile world. Some things, such as wars, viruses, legislation and so on, we can do little about. But we can focus on what we can control.

Speaking of volatile, as you are very aware, the landscape for negative gearing has shifted quite dramatically. Tax has a habit of doing this.

Until September 1985 we had no capital gains tax (CGT). Then it was introduced on an inflation-adjusted basis. In September 1999, we moved to a mathematically simpler system where all your gain was taxable, but we received a 50% discount.

Now it looks like we return to the past and pay CGT on any gains in excess of inflation on investments after 1 July 2027, with a minimum rate of tax of 30%.

Personal taxation did not exist until 1915 when our first federal income tax was introduced to help fund the war effort in World War I, the idea being that it was a temporary tax. So much for that, of course. As we all know, tax has evolved into an overly complex, vast piece of legislation.

Tax is changing and it must keep changing, upsetting some, pleasing others.

Take our age pension system. I know retirees would like payments to be higher, and unemployment benefits certainly could be. But an age pension did not exist before 1908, when it was decided men should get one at age 65. Back then men lived, on average, to 58. Now a man's life expectancy is nearly 82.

Did we need to move the qualifying age up? Yes, we did. But it was only increased to 67 for men and women, a two-year increase, when on average we live some 16 years longer.

Changes to tax are inevitable as life expectancy increases.

One of my key money rules is "investment first, tax second". I am very cautious when I see tax being the primary driver.

Take the crazy tax schemes of the 1980s and 1990s. Huge tax breaks were introduced for film production and rural activities such as pine plantations and all sorts of things. In the vast majority of these, be it a film or a pine plantation, we got very few good films or pine plantations. Salespeople and managers of these products did well, but few investors did.

Super is an area where tax is part of the conversation, but the first part is holding good-quality assets for low fees. Add tax breaks to this and we investors have a winner.

With 17% super contributions, Josh will have little or no scope to salary sacrifice into super, but you should be under the $30,000 cap and, if your super balances are below $500,000, which at your ages I think they would be, you may be able to use your unused amounts from the previous five years.

I'd like you to chat to your accountant, your super fund or a financial adviser about this.

With the changes to CGT and negative gearing, super and the family home have become two very attractive, tax-advantaged assets.

We would have had a far more interesting chat about negatively gearing an investment property before the recent federal budget, but now, of course, you are restricted to a new build.

I'll be interested to see the actual legislation, but it seems a new build is one bought from a developer, a home built on vacant land, or an older demolished property where there is a significant increase in housing density.

My decades-long view has been to negatively gear an existing property in a tightly held area near a city centre or hub, with well-established public transport, schools, entertainment and so on, with scope to improve it and with as much land as possible.

There is a simple rule here. Property depreciates, which is why investors get depreciation allowances. Land appreciates in tightly held, established locations.

It is a bit sad, but it is also true that older buildings are often better built than newer ones.

So I'd be very cautious with negative gearing under the new rules.

My view would be to keep adding to your offset account via your redraw account. Top up super to the maximum, while recognising you can't touch this money until retirement.

I think there is an investment property in your future, but I don't want to see you buy the wrong new build that you can negatively gear just for tax purposes.

I'd suggest that a bigger deposit, where your rent pretty much offsets the costs of holding the property, and buying the very best property in a great location, is the way to go.

But with your incomes, large super contributions, adding value to your home with renovations and a commitment towards saving, I have little doubt you will be financially independent well before your retirement years.

I wish you all the best.

What to read next

• Could new CGT rules make shares more attractive than property?
• The best property investments after negative gearing changes
• What happens after you pay off your mortgage
• Ask Paul: We've paid off our house in our 40s, what now?
• How to choose investments that fit your life

Get stories like this in our newsletters.