Pay Off the Mortgage or Invest? An Australian Decision Guide (2026)

Why This Matters

Australian mortgage rates climbed from ~2% in 2021 to 6%+ in 2024, then eased modestly in 2025–26. With rates at this level, "should I pay down the mortgage or invest?" is no longer obvious — and the offset account structure unique to Australian banking changes the math meaningfully.

The Australian Advantage: Offset Accounts

An offset account is a transaction account linked to your home loan. The balance offsets your loan principal for interest calculation purposes — but the cash stays liquid and accessible.

Worked example: $500,000 home loan at 6%. You park $50,000 in an offset.

• Interest is now charged only on $450,000

• Effective interest saved: $3,000/year — a guaranteed, tax-free return on that $50,000 (i.e., 6%)

• Cash remains accessible for emergencies

This is structurally different from a US "extra principal payment" — you keep liquidity, you don't trigger any prepayment process, and the saved interest is tax-free.

The Rule

Park surplus in your offset until it equals your home loan balance, then divert to investments — unless your marginal tax rate makes salary-sacrifice into super a clearly better deal.

After-Tax Mortgage Rate

For your principal place of residence, mortgage interest is not deductible. A 6% mortgage costs you 6% after tax.

For an investment property (negatively geared), mortgage interest is deductible. A 6% loan costs ~3.7% after-tax for a 37% bracket investor — completely changes the calculation.

Investment Alternatives, Ranked

• Salary sacrifice into super — taxed at 15% on entry instead of your marginal rate (32.5%, 37%, or 45%). For a 37% bracket worker, every $100 sacrificed becomes $85 inside super; the same $100 outside super is $63 after tax. Roughly a 35% structural uplift before any investment return.

• ETFs in a brokerage account — VAS (ASX 300, 0.07% MER), VGS (developed world ex-Aus, 0.18% MER). Long-run ~7% nominal, with franking credits boosting after-tax yield on Australian shares.

• Cash in offset — guaranteed 6% (matched to mortgage rate), tax-free, fully liquid.

Decision Matrix

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Salary Sacrifice: The Single Biggest Lever

The 2025–26 concessional contribution cap is $30,000 (employer SG counts toward this). For someone on $120,000 with $13,800 of SG, that leaves $16,200 of headroom for salary sacrifice.

Sacrificing $16,200:

• Tax saved: $16,200 × (37% − 15%) = $3,564 per year

• Compounded inside super at 7% over 25 years: ~$170,000 of extra wealth from the tax saving alone

Note: if you earn over $250,000 (combined income + concessional contributions), Division 293 tax adds another 15% on the contributions — but salary sacrifice still beats taxable investing for most.

Redraw vs Offset: Don't Confuse Them

• Offset: separate account; cash stays in your name; full liquidity

• Redraw: extra repayments are credited against the loan; you can re-borrow them, but it's a separate process and tax-treatment of redrawn funds for an investment property can be problematic

If your loan has both, prefer offset for surplus cash unless your lender's offset has a meaningful fee.

What to Skip

• Don't prepay your mortgage to zero before building emergency liquidity in the offset.

• Don't ignore the super match — many employers offer additional super matching, free money you should never skip.

• Don't extra-pay an investment property loan unless the cashflow is positive after deduction; the tax shield is part of the investment thesis.

The Pragmatic Plan for Most Australians

• Offset to 6 months of expenses for emergencies.

• Salary sacrifice to the concessional cap ($30,000 inclusive of SG).

• Direct any further surplus 50/50 between offset top-up and ETFs (VAS + VGS).

• Once offset = loan balance, redirect the entire surplus to investments (super, ETFs, possibly investment property).

Get a personalised view across super, offset, ETFs, and goals at the AI Financial Planner →