Pay off the mortgage or invest? A plain-English framework

Now the part people miss: that saving is after tax. You pay your home loan from money that has already been taxed, and interest on a loan for your own home is a private expense — it is not tax-deductible (ATO). So when you avoid $55 of interest, you keep the whole $55. There is nothing to declare and nothing more to pay. And because the saving does not depend on any market, it is as close to risk-free as household finance gets.

That sets the hurdle an investment has to clear. Investment earnings are generally taxable, so to match a 5.5% after-tax mortgage saving, a fully taxed investment has to earn more than 5.5% before tax. The rough rule: divide the loan rate by one minus your marginal tax rate. If your marginal rate is 32% (30% plus the 2% Medicare levy — check yours with our income tax calculator), the hurdle is 5.5% ÷ 0.68 ≈ 8.1% before tax, just to break even.

In practice the hurdle is usually a bit lower than that, because the tax law softens the blow for long-term investors — the capital gains tax discount and franking credits, covered below. Untangling exactly how much lower is fiddly by hand, which is precisely why the mortgage-vs-invest calculator exists.

A commonly used long-run assumption for a diversified portfolio is around 7% a year — the sort of figure government tools like Moneysmart’s calculators let you plug in. In our calculator it is exactly that: an assumption you control, pre-filled but fully editable, because nobody — including us — knows what markets will return. Past performance is not a guide to future returns.

That volatility matters more than the average suggests, because of something called sequence risk — the risk that the order of returns hurts you. Two investors can earn the same average return and end up with very different balances, depending on when the bad years land. If you are adding money regularly, a market slump early on is survivable, even helpful — you are buying cheaply while your balance is small. But a bad stretch late on, when your balance is at its biggest, does real damage right when you planned to use the money. The mortgage has no sequence risk at all: every dollar earns the loan rate from day one, in any market weather.

So the honest summary is: investing has a higher expected return over long horizons, and a real chance of doing worse than the boring, guaranteed mortgage saving — especially over shorter periods. Neither fact cancels the other. Both belong in the decision. (New to how compounding builds over decades? Our compound interest calculator and plain-English guide to ETFs — exchange-traded funds — are good starting points.)

Keep $20,000 in a 100% offset against a 5.5% loan and you save about $1,100 in interest a year — exactly the same saving as a $20,000 extra repayment. You can see how an offset changes your payoff date in the mortgage repayment calculator.

That flexibility has genuine value. It is your emergency buffer, your renovation fund and your “maybe I’ll invest it later” option, all while earning the mortgage-rate saving, tax-free. An offset lets you postpone the pay-down-or-invest decision without the money sitting idle.

First, offsets often come packaged with an annual fee or a slightly higher interest rate, so a small offset balance can cost more than it saves — worth checking on your own loan. Second, accessible money requires discipline; an extra repayment locks the win in, an offset merely makes it available.

A related feature, redraw, lets you pull back extra repayments you have already made. In interest terms it behaves like an offset, but legally the redrawn money is new borrowing, and what you spend it on sets its tax character. That distinction becomes important if your home might one day become a rental, or if you are looking at strategies like debt recycling — our separate guide covers the mechanics.

Your home loan interest is not deductible. Interest is only deductible when the borrowed money is used to produce assessable income — an investment property, shares — not for private purposes like your own home (ATO). This asymmetry is the quiet engine behind the whole comparison: paying down non-deductible debt is a tax-free win, while borrowing to invest gets tax help.

Investing outside super gets two concessions. If you are an Australian resident and hold an asset for more than 12 months, only half of any capital gain is taxed — the 50% capital gains tax (CGT) discount (ATO). And dividends from Australian companies usually carry franking credits: a credit for company tax already paid, at the 30% company rate for most listed companies (25% for base-rate entities — smaller companies under the turnover threshold) (ATO). Both effectively lower the pre-tax return an investment needs to beat your mortgage. Our franking credits calculator shows the gross-up on your own dividends.

Super is the forgotten third option. The question is usually framed as “mortgage or shares”, but salary sacrificing into superannuation is often the strongest tax play of the three. Concessional (before-tax) contributions are taxed at 15% inside the fund instead of your marginal rate (ATO) — so a dollar that would have arrived in your pay packet as 68 cents can land in super as 85 cents. The concessional cap is $32,500 for FY2026-27, indexed up from $30,000 in FY2025-26 (ATO), and your employer’s compulsory contributions — the super guarantee, 12% of ordinary earnings since 1 July 2025 (ATO) — count toward it. High earners note: if your combined income and concessional contributions exceed $250,000, Division 293 tax adds another 15% on the contributions above the line (ATO). The catch, and it is a big one, is access — super is locked away until you meet a condition of release, typically from age 60. Run your own numbers with the salary sacrifice super calculator.

The split is not permanent; it can drift toward the mortgage when rates are high and toward investing when the loan is small. Watching both sides grow at once is its own kind of motivation — our equity over time tool shows the home-equity half of that picture.