The Rate Hikes Keep Coming: Should You Pay Down Your Mortgage or Keep Investing?

The RBA’s war against inflation continues unabated. Australia’s central bank has now lifted the cash rate four times this year to 4.6% as its inflation fears have materialised.  

It’s an expensive time to be a mortgagee.  

For the millions of Australians with a mortgage and a little spare cash each month, that brings to the fore the age-old question: should you use your spare funds to pay down your home loan, or keep investing?  

The answer depends on tax, time and your temperament. 

One thing’s for sure: the optimal answer has shifted for everyone in recent months. 

Key Takeaways 

• Every dollar off a variable home loan earns a guaranteed, tax-free return equal to the interest rate, currently averaging 6.9% p.a. (and rising). 
  
  
• On a combined 32% marginal rate, that equals about 10.1% before tax, more than Australian shares have returned over 30 years. 
  
  
• From 1 July 2027 the 50% CGT discount is replaced with indexation and a 30% minimum tax, trimming after-tax returns on many investments outside super. 
  
  
• Investing can still come out ahead over long horizons, particularly through super or if rates fall, but without any guarantee. 
  
  
• For most households the answer is not either-or: an offset account, buffers and a deliberate split can capture the upsides of both. 
  
  

What This Latest Hike Is Costing Mortgagees 

The RBA’s latest 0.25 percentage point rate rise is a costly one for mortgagees.  

It will add $91 a month to repayments on a $600,000 loan with 25 years remaining. 

It brings the total interest increase across this year’s four rate hikes to $363 a month.  

That’s a lot of disposable income that’s no longer disposable. 

With the average new owner-occupier loan now $731,000, the more concerning context is how high the average mortgage payment is relative to income levels. 

The RBA’s August Statement on Monetary Policy highlighted that mortgage payments relative to income are close to their 2024 peak. 

The Guaranteed Return Hiding in Your Mortgage 

To the big question: whether to pay off your mortgage as soon as possible, or keep investing. 

Every extra dollar paid off a home loan saves interest at the loan rate.  

Since interest on an owner-occupied mortgage is not tax-deductible, that saving is effectively a guaranteed, tax-free return.  

The average variable rate is currently 6.9%, and is likely to further rise after the RBA’s latest rate increase. 

To compare fairly with the investment alternatives, convert that to a pre-tax figure.  

Using the 2026–27 tax rates, someone earning between $45,001 and $135,000 pays 30% plus the 2% Medicare levy, a combined 32%.  

For that person, a 6.9% p.a. mortgage is equivalent to earning 10.1% p.a. before tax.  

On a combined 39% rate the hurdle is 11.3% p.a., and on the top 47% rate, 13% p.a.  

How That Compares with Market Returns 

Those hurdles are becoming increasingly demanding when compared with average investment returns.  

Vanguard’s 2026 Index Chart shows $10,000 in Australian shares on 1 July 1996 grew to $132,931 by 30 June 2026, a return of 9% p.a. US shares returned 10.8% p.a., international shares 8.6%, listed property 7.8% and Australian bonds 5.2%. 

Those figures are before tax and fees. 

Achieving them involved successfully navigating several sharp drawdowns along the way.  

Franking credits improve the after-tax picture for Australian equities. 

However, for most middle-income earners, today’s high and rising mortgage rates are setting the bar at a level that long-run equity returns have only roughly matched – and paying down a mortgage comes without any of the risks. 

The Tax Change That Tilts the Maths in the Wrong Direction 

Sadly, there’s worse news to come. 

Many investors have not yet factored in the recent capital gains tax overhaul.  

From 1 July 2027, the 50% CGT discount for individuals, trusts and partnerships will be replaced with cost-base indexation and a 30% minimum tax on gains. The measures are now law.  

Gains accrued before that date keep the existing treatment, and super funds are not expected to lose their discount.  

The upshot is that for most investors outside super, future after-tax returns will be lower than in the past, further strengthening the case for debt reduction or investing inside super. 

The Case for Continuing to Invest 

Before you start using all your spare cash to repay your mortgage, it’s worth highlighting that paying down debt is not automatically the better choice.  

The guaranteed return in paying down your mortgage is only guaranteed at today’s interest rates.  

However, all four major banks expect cuts to begin in 2027, with CBA and NAB pencilling in May, and ANZ and Westpac, August.  

So, over the remaining life of a 25- or 30-year loan, the average rate may well be lower than today’s. 

Super changes the arithmetic too.  

Concessional contributions are taxed at 15% within the caps, and earnings in the accumulation phase at no more than 15%, so for someone on a 32% or higher marginal rate, salary sacrificing delivers an immediate tax saving that extra repayments cannot.  

The trade-off is that funds invested in super are preserved until retirement. 

Diversification also deserves a mention here.  

Directing every spare dollar into your home concentrates your wealth in the one illiquid asset.  

In contrast, robust, resilient portfolios tend to be diversified across a range of asset classes that respond differently during market sell-offs, accessible through managed funds, ETFs and multi-asset portfolios. 

Paying down your mortgage also carries a liquidity risk that’s easy to overlook.  

Extra repayments may be accessible through a redraw facility, but lenders can restrict or change the redraw terms.  

A Layered Solution 

Rather than choosing one distinct pathway forward, savvy households are often working through this decision in three layers: 

1. Build Resilience 

By building an emergency buffer of several months’ expenses, ideally held in an offset account, where it also cuts households’ interest payments, they are approaching the decision without financial stress weighing on them. 

2. Compare the Alternatives with Realistic Expectations 

By comparing the risk-free, after-tax return from their mortgage with a realistic, rather than best-case, estimate of after-tax investment returns, households are able to see that it is currently a close call whether to pay off their mortgage or invest. 

That’s valuable context which highlights the importance of not bringing binary thinking to this decision. 

3. Decide Based on Your Circumstances and an Awareness That No One Knows the Future 

Being aware that no one knows the future is a superpower here. Interest rates could be cut sooner than expected, which would probably push the decision towards investing over mortgage repayments. Only time will tell. 

For many households, a deliberate split, with part of each month’s surplus cash going to their offset account and part into a diversified portfolio, is the optimal approach as it balances certainty with long-term growth.  

It can also be adjusted as rates change. 

A Guaranteed 10% Is Hard to Beat, but It Isn’t the Whole Story 

With interest rates as high as they are, extra mortgage repayments offer a return that is certain, tax-free and, for many middle-income earners, worth about 10% p.a. before tax. On these numbers, paying down your mortgage has rarely looked like a more sensible idea. 

It’s important to remember that this decision is not only about this year’s interest rate, though. Rates are expected to fall again from 2027, super offers tax advantages that debt reduction can’t match, and liquidity and diversification are valuable for long-term investors.  

The most robust approach may be to secure a buffer first, measure your true after-tax hurdle, then choose a split between paying off your mortgage and investing that suits your time horizon and risk tolerance. 

Frequently Asked Questions 

Is It Better to Pay Off the Mortgage or Invest in 2026? 

It depends on your tax rate, time horizon, buffers and risk tolerance. With variable rates averaging 6.9%, paying down your mortgage offers a guaranteed return equivalent to 10% or more before tax for many earners. That’s a high bar for investments to beat consistently. 

Is Money in an Offset Account the Same as Paying Off the Loan? 

It saves the same interest as an extra repayment, but the money remains yours and accessible, which is why many borrowers prefer offset accounts. 

What Pre-Tax Return Do I Need to Beat My Mortgage Rate? 

Divide your mortgage rate by one minus your marginal tax rate including the Medicare levy. At 6.9% and a combined 32% rate, that’s 10.1%. 

How Does the New CGT Regime Affect the Decision? 

From 1 July 2027 the 50% discount is replaced with inflation indexation and a 30% minimum tax, which will lift the tax on future gains for many investors outside super and modestly favour debt reduction or super contributions. 

When Will Mortgage Rates Fall? 

The major banks expect the RBA to begin cutting in 2027, but forecasts have changed several times this year and depend on how inflation and the Middle East conflict evolve. 

Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.