As an expat mortgage broker, we’ve guided many Australians like you through the financial wilderness. One question that often comes up is whether it's better to pay down the mortgage back home or invest in stocks.

Let's unravel this knot together, shall we?

Introduction

First off, let's understand the basics. Paying down a mortgage refers to reducing the amount of debt on your Australian property. The more you pay, the less you owe and the sooner you'll own your home outright. Sounds pretty great, right?

On the other hand, investing in stocks means buying shares in companies, with the hope that they increase in value over time, providing you with a return. Imagine owning a piece of a successful company like Apple or BHP. The prospect can be quite tantalising!

Both paths have their own risks and benefits. Paying off your mortgage guarantees savings on future interest payments, but it ties up your money in a single asset - your home. Meanwhile, stocks have historically delivered strong returns over the long term but can be volatile and may even lose value. There are also many other factors such as tax liabilities both now and in the future, estate planning, diversification of our investments and overall tax deductibility going forward.

Factors to Consider

As we wade through these financial waters, there are several factors we need to consider.

Current interest rates in Australia can play a big role in your decision. If rates are low, your mortgage might not be too costly, and it could make sense to invest elsewhere for a potentially higher return. Conversely, high rates could make it more advantageous to pay down the mortgage.

For example, if the interest rate on your mortgage was 10%, and you expected that your share portfolio would deliver an 8% return, then paying down your mortgage may be quite a sensible move. If the mortgage interest rate was only 5%, however, then the conclusion may be different.

Next, consider the market conditions. Is the stock market bullish, or is it bearish? Do you have the risk appetite for investing in stocks during unstable times, or would you prefer the surety of reducing your debt? Whilst we do not expect that anyone can time the market perfectly, we can usually get a sense of whether we feel growth assets are relatively cheap or relatively expensive, and this can guide our decision making.

Your personal financial situation also plays a significant role. If you have a stable income, savings, and no other significant debts, you might be more comfortable taking the risk of investing in stocks. However, if your financial situation is less secure, it might make more sense to pay down your mortgage.

Further, what are your long-term financial goals? If you're looking to retire in Australia, owning your home outright could be a top priority. But if you're planning to stay overseas for the long haul, investing in stocks could provide a better return. You may even prefer to structure this with both avenues in mind, particularly if you’re planning to remain offshore for many years – i.e. you may plan to invest in stocks over the next 5 – 7 years, with the view of selling down all or a portion of your investments to pay down the mortgage on your home.

Don’t Ignore the Tax

One of the most important considerations for many Australian expats is the tax considerations. This is both in terms of your tax liability currently and your future tax liability, both of which require some consideration to guide your decision making about whether you should pay down your mortgage or invest in shares.

For example, if you have an Australian investment property that was neutrally geared, meaning that the outgoing expenses matched the income rental income, then you would have no tax liability in Australia on the rental income. If, however, you decided to reduce the mortgage on your investment property, and therefore had less deductions, then your rental income would become taxable at 32.5% on the first $120,000.

The next consideration here is the tax losses that you might be accumulating or have already saved from previous years of losses on your investment property, whether from depreciation or the actual cash outflows. If you have losses accumulated from your investment property, you could elect to utilise these to save the 32.5% tax in Australia and reduce your taxable income.

However, you may be better off saving them for a later date when your tax rate may be higher. This could occur because you realise a capital gain, or have a relatively high income in Australia and you’re paying close to 50% tax.

The tax considerations when it comes to deciding whether to pay down your mortgage or invest in shares is one of the most critical.

Case Studies

Let's illuminate these concepts with some real-world examples.

Take our fellow expat, John Doe. John had a hefty mortgage on his Sydney home but managed to negotiate a favourable interest rate. With a stable job in London, he decided to focus on paying down his mortgage, reducing his monthly outgoings and providing a safety net for any unexpected events. Fast-forward a few years, John owns his Sydney home outright and is now free to invest elsewhere.

John was only in London for 3 years, so his financial adviser suggested that it may be too short a time frame to put his capital at risk in the stock market, and instead should pay down the mortgage given that he planned to live in the property when he repatriated.

In contrast, Jane Smith, another Aussie expat, found herself in a different boat. With an interest in the stock market, she saw the potential for higher returns and chose to invest her spare cash in a diversified portfolio of shares. Today, Jane's investments have grown significantly, outpacing the interest she would have saved by paying down her mortgage. Jane was living in Hong Kong for 9 years, and not only did she generate a great return on her share portfolio over this time, she also accumulated tax losses on her investment property that she can utilise in future years.

These cases illustrate how personal circumstances can influence the best course of action.

Concluding Thoughts

But wait a minute! Do we always have to pick a side? As a mortgage broker, I often encounter this misconception. But in reality, there’s a middle ground - diversification. That's just a fancy way of saying 'don't put all your eggs in one basket'.

Suppose you have $1000 extra per month. Rather than putting it all towards your mortgage or stocks, you could split it. Let’s say you put $600 towards your mortgage and invest the remaining $400 in stocks. Over time, you're chipping away at your mortgage while also giving yourself a chance to benefit from potential stock market gains.

It's not always about one or the other. The trick lies in balancing your investments to align with your financial goals, risk tolerance, and current market conditions.

In the end, whether you should pay down your mortgage or invest in stocks isn't a question I or anyone else can definitively answer for you. It's a decision that requires careful thought, a good understanding of your financial position, and ideally, advice from a professional.

Take a breath. Assess your options. Maybe even chat with a financial adviser.

And remember, no matter what you choose, the fact that you're making conscious decisions about your financial future is a step in the right direction.

Got questions? Let’s continue the conversation in the comments below.

Ally Home Loans Pty Ltd is your ally in finance for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.

Book an obligation-free, complimentary consultation here today.

Ally Home Loans Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.