03.If you have a lump sum
Pay a lump sum
As long as your lender doesn’t penalise you for making extra payments, your mortgage can be a pretty good ‘investment’.
- You’ll reduce the principal amount on which interest is calculated (so you’ll pay less interest overall) and clear the loan quicker.
- This effectively gives you a return on the ‘invested’ lump sum equal to your mortgage rate tax-free.
For example, if your marginal tax rate is 31.5% (including the Medicare levy), you’d need to find an investment returning around 12% before tax to give the same benefit as a mortgage lump sum payment. If you pay income tax at 46.5% (including Medicare), you’ll need to earn almost 16% to make a similar profit. There aren’t many low-risk investments returning 12–16%.
Example: Craig and Danielle pay the minimum weekly amount on their 30-year $400,000 loan, which is in its third year. The rate is 8.5%. Paying a one-off $5000 lump sum after year three would cut around a year and three months off their loan, saving them nearly $42,000 in interest in the long-run.