Interest rates are going up: Should you pay down your mortgage or buy ASX shares?

If you’re among the 33% of Australians with a mortgage, you’re likely to have noticed a dramatic increase in your mortgage repayments this year. 

Since the beginning of 2026, the Reserve Bank of Australia (RBA) has lifted the cash rate four times, taking it from 3.6% to 4.6%. This represents a 15-year high.

For those with an average $731,000 loan balance, this change is meaningful. For those with an even larger mortgage or insufficient income to cover it, the change is likely to be especially stressful. 

At the same time, a record number of Australians are investing.

According to the 2026 ASX Investor Study, 11.5 million Australians are now investing outside of their superannuation or primary residence in 2026. That’s up by 2.5 million since 2020. 

The largest allocation is to ASX-listed shares, with 58% of investors holding them. 

Approximately 950,000 Australian adults also plan to start investing in the next 12 months.

Interest in Self-Managed Super Funds (SMSF) investing is also rising. Around 20% of non-SMSF investors say they’re considering establishing an SMSF in the next 12 months.

Overall, the data is showing that a growing number of Australians are committed to growing their wealth through investing. However, in the face of mortgage pressures, many of these investors may be reconsidering whether to pay down the mortgage instead. 

While this is a highly personal decision, a simple calculation can help Australian mortgage holders decide which option is more likely to put them ahead.

So let’s run through the numbers.

Calculating your before-tax mortgage rate

According to the RBA, the average variable interest rate on owner-occupied properties stands at 6.2%. 

Unlike investment properties, interest repayments on mortgages for primary residences are not tax deductible. This means that homeowners must make mortgage repayments after paying income tax.

So, it’s the before-tax figure that matters.

In Australia, we have a progressive tax system. This means that higher income earners are taxed at higher rates than lower income earners. As a result, the pre-tax mortgage rate will be greater for higher income earners. 

Here’s how to approximately calculate the after-tax rate (including the 2% medicare levy):

Tax bracket	Marginal Tax rate	After tax	Before tax
$0 – $18,200	0%	6.2%	6.2%
$18,201 – $45,000	17%	6.2%	7.5%
$45,001 – $135,000	32%	6.2%	9.2%
$135,001 – $190,000	39%	6.2%	10.2%
$190,001 and over	47%	6.2%	11.7%

Long-term ASX share market returns

The next step is to estimate the return you’re likely to receive by investing in ASX shares. 

According to the 2026 Vanguard Index Chart, Australian shares have returned 9.0% over the past 30 years. While returns have varied year to year, this is a useful proxy for investing in ASX shares and holding them for at least 5 years.

Compare the pair

Now that we’ve run through the numbers, a comparison can be made to determine whether it’s more advantageous to pay down the mortgage or buy ASX shares. 

Let’s make that comparison for the average Australian. 

According to the Australian Bureau of Statistics (ABS), the average Australian annual income in 2026 is $108,352.40. That puts them in the 30% tax bracket (for the upper portion of their income), meaning their pre-tax mortgage rate is 9.2%. 

This is very close to the average return for ASX shares, which comes in at 8.9%. 

So for the average Australian income owner with a mortgage, it’s essentially a draw.

For higher-income earners, paying down the mortgage is slightly more advantageous (11.7% vs 9.0%).

Other considerations

As most mortgage holders would know, there’s more to consider than just the raw figures.

Perhaps most importantly, the emotional burden of being committed to large mortgage repayments can be significant. 

As reported by the Australian Financial Review, the percentage of household income spent on mortgage repayments is near historic peaks, as of mid-2026.

New South Wales, which has the highest average mortgage at around $850,000, has been most affected. The average New South Wales family spent more than 30% of household income on mortgage repayments in June this year. Meanwhile, the average Queensland family allocated 28% towards their mortgage, while South Australia and Western Australia came in at 26%. Victorians paid just 22%.

Another important consideration that would vary the equation is the type of ASX shares that the mortgage holder invests in. While the 30-year average may be a good proxy for investing in index funds such as the Vanguard Australian Shares Index ETF (ASX: VAS), returns vary dramatically based on stock selection. 

Mortgage holders with a track record of significantly outperforming the market may prefer continuing to do so instead of paying down their debt.

What if the RBA raises rates again?

Unfortunately for mortgage holders, further rate hikes have not been ruled out. 

The market has priced in a 30% chance of another rate hike in November 2026. Another one is widely expected in May 2027. 

According to Deloitte Access Economics, should the RBA lift the cash rate to 4.85%, a borrower with the average-sized owner-occupier loan would pay around $9,000 more in annual interest than a year ago. 

This would tip the equation in favour of paying down the mortgage for the average Australian income owner and set a higher returns threshold for preferencing ASX shares.

The post Interest rates are going up: Should you pay down your mortgage or buy ASX shares? appeared first on The Motley Fool Australia.

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Motley Fool contributor Laura Stewart has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.