Should we use savings to pay down mortgage or invest in shares?

For the past five years my husband and I, age 28 and 27, have been putting as much as we possibly can into extra mortgage repayments. For some time we weren’t putting anything into a savings account because we figured we could redraw if we were desperate. We are now putting 10 per cent of our income into savings and 20 per cent into extra mortgage repayments. Should we keep focusing on getting our loan down, or should we invest in share-based investments at the same time?

It’s long been my belief that the best strategy for people starting off is to get their mortgage under control and then think about other investments. Because of the way compound interest works, the shorter the time period of the loan, the less effect extra payments make.

For example, if you had a loan of $500,000 over 30 years at 6 per cent, repayments would be $3000 a month. Increasing those repayments by just $600 a month would cut the term by 10 to 20 years. But to cut a further 10 years off the term would require an extra $2000 a month.

I think a good target for a home loan is 12 years – in which repayments would be $1000 a month for every $100,000 of the loan. For example, in a loan of $500,000 the optimum payments would be $5000 a month.

Once payments are at this level, your loan is under control and you could think about other investments. I think an index fund that matches the ASX top 200 shares would be the perfect investment for that. There are no decisions to make, and the fund has averaged 9 per cent per annum for the past 120 years.

My parents, aged 65 and 64, are still working full-time in their own business. They own their home, have no debt and have more than $3 million in cash. Their super balances are about $600,000 each. I think they should make a non-concessional contribution before June 30 of $110,000 each, and then an additional non-concessional contribution after July 1 ($330,000 each), to get $880,000 of their cash into super this year, so that it earns tax-free income when they retire, and switch their super funds into pension mode.

If they use the bring-forward rule on July 1 to make non-concessional contributions of $330,000 each (using the 2025, 2026 and 2027 financial year caps), does this stop them from retiring and switching their funds into pension mode as soon as they like (let’s say, for argument’s sake, July 1, 2025)? I’m unsure if contributing $330,000 using the bring-forward rule on July 1 (2024) means they’ll have to wait for the three years to play out before being able to switch their funds to pension mode.

I think they’re the perfect age for that strategy but just keep in mind that the non-concessional contribution limit increases from $110,000 a person to $120,000 after June 30. Therefore, a $110,000 contribution can be made before June 30, and then $360,000 after June 30 using the bring-forward rules.