Should You Pay Down Debt or Invest?

On the surface, investing might seem more lucrative. After all, if your mortgage interest rate is 5% and you believe you can earn 10% in the sharemarket, why wouldn’t you chase the higher return? The problem is, you’re not comparing apples with apples.

Mortgage interest is a net cost—no fees, no tax, no inflation adjustment. Meanwhile, investment returns are gross figures. Subtract 1% in management and transaction fees, 3% in taxes (yes, even without a formal capital gains tax in NZ, international diversification can incur tax), and 3% for inflation, and your 10% return quickly shrinks to a real return of around 3%.

Compare that to a 5% mortgage rate: you’re 2% better off paying down your mortgage than trying to beat the market. And that’s before we even talk about risk.

A big part of the challenge is psychological. Humans like to feel like they’re doing something—tinkering, flipping properties, jumping into stocks or NFTs. But often, the best strategy is the most boring one: pay off your mortgage.

This isn’t to say investing is bad—far from it. There’s a time and a place for investing in shares and ETFs. But if you’ve still got debt, particularly high-interest debt like credit cards or consumer loans, you’re starting from behind.

The good news is you can flip that psychological urge to your advantage. Gamify your debt reduction. Set milestones, track progress, and celebrate small wins. This approach works whether you’re reducing credit card balances or aiming to buy an investment property.

One client went from being 90% loan-to-value and $2,000 in the red each month to working with our team and getting into a position to invest. The key? A clear plan and consistent, small steps.

There are always exceptions. Investment properties, for instance, use your existing equity as leverage—this is different from investing with cash into shares. If you’re at the right stage of your financial journey, these strategies can work. But for most Kiwis asking the question, the roadmap is simple:

Spend less than you earn → Pay down your mortgage → Build equity → Then invest.

• You’re not comparing like with like: Mortgage interest is a net cost, investment returns are gross.

• After fees, tax, and inflation, a 10% gross return might only deliver 3% in real terms.

• Paying off your mortgage at 5% effectively gives you a better net return than most investments.

• Psychological factors often lead people to chase action, but boring, consistent financial behaviour builds wealth.

• Gamifying debt repayment can be a powerful motivator—set goals and track your progress.

• Stick to the plan: Don’t let FOMO or peer pressure push you into unnecessary risk.

• Only consider investing in shares once your debt is under control.

If you’d like to learn more, check out these other episodes below.