Using Savings to Pay Down a Mortgage: Does It Still Make Sense?
Not so long ago, one of the most effective low-risk wealth creation strategies was to use surplus savings to pay down a mortgage—either directly or through an offset account.
When interest rates were higher, this approach delivered a strong, after-tax return while significantly reducing the life of the loan and total interest paid.
But in today’s environment, with lower interest rates, does it still make sense? Or could your savings be better deployed elsewhere?
Let’s explore this through a practical example.
Emma is a 45-year-old professional with a $200,000 mortgage at 3.4% p.a. Her marginal tax rate is 39% (including Medicare levy), and she has the capacity to save $2,000 per month.
She also carries $10,000 in credit card debt at 20% interest and has a solid superannuation balance, with no desire to increase contributions at this stage.
Where to start
Although relatively small in size, Emma’s credit card debt should be her first priority due to its high interest rate.
A simple rule applies: pay off the highest interest debt first. If possible, consolidating debt into a lower-rate facility—such as a home loan—can also be beneficial.
What next?
Once the credit card debt is cleared, Emma can focus on making the most of her savings capacity.
She may find investment opportunities that offer returns higher than her mortgage rate of 3.4% p.a. On the surface, investing might seem like the better option—but there are two key considerations: tax and risk.
Understanding tax
Paying down a mortgage effectively delivers a risk-free return equal to the interest rate—in Emma’s case, 3.4% after tax.
However, income from investments is typically taxed at her marginal rate. To match a 3.4% after-tax return, Emma would need to earn approximately 5.6% before tax.
Growth-based investments, such as shares or property, may offer tax advantages through capital gains discounts—but these come with additional complexity and risk.
Balancing risk and return
Higher potential returns generally come with higher risk. Paying down a mortgage is one of the closest things to a risk-free return.
Investing, on the other hand, introduces market volatility and uncertainty—but may offer greater long-term growth.
The right balance depends on your personal situation, including your stage of life, income, goals, and tolerance for risk.
Finding the right approach
There’s no one-size-fits-all answer. For many people, a blended approach—reducing debt while also investing—can provide a balanced path forward.
If you have surplus savings and want to make the most of them, speaking with a professional can help clarify your options.
Explore a wealth creation strategy that’s right for you with K Point Wealth.
Speak with K Point Wealth
Call us on 07 3891 5666 or email admin@kpointwealth.com.au to discuss your situation.
