Should I pay off my home loan or invest?

Hello grownups!

I quite often get emailed by people who have suddenly come across a pile of cash (from mugging leprechauns, I presume) who want to know whether it makes more sense for them to pay off their home loans, or invest in the stock market. I answered a version of this question previously, but to reiterate my thoughts on this:

Short answer:
It depends.

Medium answer:
Of course, when you’re talking about investing, you can only make guesses based on averages. On average, over the long term, you are likely to make more money investing in equities than you will save money paying off your home loan faster.

Purely financially, it usually makes more sense to invest in equities (something like a diversified ETF) rather than accelerating your home loan payments. That's simply because the average long-term returns from equities is higher than the average interest rates (cost) of home loans.

A home is an undiversified investment, and an ETF is a diversified investment. So, you also reduce your overall investment risk by investing in shares alongside paying off your home faster.

But, investing might not be right for you if:

You're nearing retirement and don't want the stress of having to manage home loan payments every month.
Emotionally, you just really value not having debt, in which case, that emotional reason might trump the finances for you.
You have no wiggle room in your budget and if interest rates on your home loan increased you’d be in trouble.
You have no tolerance for the wobbliness of equities.

Note that this only compares two options: investing in a well-diversified ETF or paying off your home loan, but the best thing for you to do with a windfall might be something else, like paying off high-interest debt if you have any, or starting an emergency fund, or buying an entire shipping container filled with Skittles.

Long answer:

It depends!

No, really. The answer to this question really does depend on your own situation, goals, your tax life, the terms of your home loan, and overall financial portfolio. You should take all of these elements into account when trying to make this decision, and talk to a financial advisor if you need help.

That said, don’t get paralysed trying to predict the future and work out what the ideal strategy is. It’s better to do EITHER of those things than to do neither of them. If you’ve thought it through for a bit and you’re still confused, just split the difference, or do the one that will make you feel happier and more secure, because those are also important variables to optimise for!

Sam