As someone navigating both a mortgage and a portfolio of investments, this question hits close to home: Should I throw extra cash into my mortgage, or should I invest it instead? It sounds like a simple fork in the road, but the more I’ve thought about it, the more I’ve realised it’s not just about math. It’s about psychology, risk appetite, opportunity cost, and peace of mind.
Let me walk you through how I’ve approached this decision, what I’ve learned along the way, and why, despite believing in living debt-free, I lean toward investing instead of aggressively repaying my mortgage.
My backstory
To give some context, my mortgage is a flexi loan. At first, I thought of it like any other mortgage: a big loan from the bank that I chip away at every month. But the flexi feature adds an interesting twist.
Here’s how it works in practice. Say my scheduled repayment is $2,000 a month. If I pay $3,000 instead, the extra $1,000 immediately reduces my outstanding loan balance. That means I save interest right away. However, the key difference is the redraw facility. Unlike a fixed prepayment where the money is locked away forever, I can pull that $1,000 back out later if needed.
To me, it feels like a cross between a savings account and a loan. I get the benefit of lowering my debt and saving on interest, while knowing I can access that cash again if life throws me a curveball.
This flexibility is what makes the decision harder. Do I keep piling extra money into the loan, knowing I can redraw it later, or do I send those funds into the market where they might grow faster but more uncertainly?
Option 1: Making extra repayments
The most obvious path is to throw every spare cent into your mortgage. On paper, this feels safe and rational.
The pros of this approach:
- Guaranteed savings: If your mortgage rate is 4%, every extra dollar you repay is like earning a guaranteed 4% return. No stock market volatility, no sleepless nights.
- Peace of mind: There is something deeply reassuring about watching your mortgage balance shrink. The idea of being debt-free earlier appeals to almost everyone.
- Lower interest cost over time: By reducing the principal earlier, you save thousands in interest over the life of the loan.
- Liquidity through redraw: Your money isn’t locked away forever because of the redraw facility. You can still access it if needed, although some banks set conditions on how much or how often you can withdraw.
But there are trade-offs:
- Opportunity cost: That 4% “return” looks decent only when compared to leaving cash idle in a savings account. Historically, a diversified investment portfolio or even broad stock indices such as the S&P 500 have delivered higher long-term returns.
- Psychological trap: Some people become so focused on hammering down their mortgage that they neglect investing entirely. The risk is ending up “house rich, cash poor.”
- Money is less productive: Your capital is just reducing interest, not compounding beyond that. The effect is linear, not exponential.
- Redraw isn’t foolproof: Banks may impose limits or fees, and withdrawals can take time. By the time the funds arrive, the investment window you wanted to capture may already be gone. In that sense, your “available funds” are not as liquid as cash in hand.
Option 2: Investing the money instead
The counter-strategy is to keep making your required monthly payments, but divert any surplus funds into investments instead. This could be stocks, ETFs, or other growth assets.
The upside of this approach is compelling:
- Higher potential returns: Equity markets have historically delivered 7-10% annually. Over the long term, even after accounting for volatility, that usually beats the 4% “return” you lock in by prepaying your mortgage.
- Liquidity control: You decide when and where to deploy your capital. Unlike mortgage prepayments, your money is not tied to a single use.
- Wealth building: Over decades, compounded returns can surpass the interest saved from early mortgage repayments by a wide margin.
- Reduced concentration risk: Real estate dominates most homeowners’ net worth. Investing builds balance by spreading wealth into other asset classes.
Of course, there are caveats:
- No guarantees: Unlike the guaranteed savings from debt repayment, investing is uncertain. The market could deliver negative returns in the short term. If your returns fall short or you invest poorly.
- Discipline required: If you choose investing over repayment, you must invest. It’s easy to say you’ll put money into the market, but many people spend it instead.
A practical illustration
Let’s make this real with a simple scenario.
Suppose you have a $500,000 mortgage at 4% interest, with 25 years left. You can spare an extra $1,000 per month.
- If you put it into the mortgage: That $1,000 directly reduces your loan balance, saving you about $40 in interest in the first month, and compounding savings thereafter. Over 25 years, you would save more than $121,000 in interest and pay off the loan around 10 years earlier.
- If you invest it at an average 8% return: $1,000 invested every month for 25 years at 8% compound interest would be worth about $877,000. Even if the market underperforms and you only get 6%, you’d still end up with nearly $658,000.
So the trade-off is stark: debt-free security versus potentially much larger wealth.
Balancing the emotional and rational sides
Life isn’t purely a numbers game. We aren’t calculators; we also value peace of mind as much as financial returns. I know people who can’t sleep at night knowing they owe the bank money. For them, the “return” from being debt-free isn’t just measured in dollars, it’s measured in psychological freedom. No chart of S&P 500 returns can compete with that sense of relief.
For others, myself included, a different psychology comes into play. I’m comfortable with risk, I see market volatility as the price of opportunity, and I prefer the idea of my money working harder than 4%.
Why I personally lean toward investing
After plenty of reflection, I’ve chosen to lean toward investing rather than throwing every spare cent into my mortgage. My reasons are straightforward:
- The opportunity cost is too high: With mortgage rates still relatively low, I would rather put surplus cash into equities, where the long-term odds of stronger returns are in my favour.
- I want flexibility with my wealth: A house is valuable but illiquid. By building a portfolio alongside my mortgage, I keep a pool of assets to trim or liquidate if opportunities or emergencies arise.
- A psychological twist: My mortgage is with a major bank. When I pay interest, I know the bank is profiting from me. So I buy their stock. In a way, I claw some of that profit back. Every repayment reminds me that while I am the customer, I’m also a shareholder.
That last point might sound quirky, but it gives me real psychological comfort. Instead of feeling like the bank always wins, I share their success. When they announce record profits, I’m not just grumbling as a borrower, I’m quietly smiling as an owner.
The fifth perspective
Ultimately, there’s no single “right” answer to whether you should repay your mortgage early or invest. It depends on your goals, your tolerance for risk, and how much value you place on peace of mind versus growth. For some, the comfort of being debt-free outweighs everything else. For others, the chance to build wealth through investing is too compelling.
For me, the math, the psychology, and the long-term vision all point in the same direction. I will keep paying down my mortgage steadily, but my extra cash goes into investments, especially in the very bank that holds my loan. It’s a strategy that keeps me disciplined, diversified, and motivated. Most of all, it makes me feel like I’m not just playing defence by paying interest, but also playing offence by growing my wealth. And in the long run, that balance feels right for me.
