By Paul Feeney, Founder and Chief Executive Officer, Otivo
There's a comparison almost every Australian household with a mortgage and a bit of spare cash makes at some point, and almost everyone makes it wrong. They compare the mortgage rate to a hoped-for investment return and conclude that investing wins. The comparison is broken, because those two numbers aren't measured the same way. A dollar of interest saved on a mortgage is a dollar you keep. A dollar of investment return is a dollar the tax office takes a slice of first. Once you correct for that, the number an investment has to beat is materially higher than the mortgage rate — and for someone on the top marginal rate with a 6% mortgage, it's about 11.3%.
Money used to repay a non-deductible mortgage produces an after-tax return equal to the loan rate. An investment return is generally taxable, so to match a 6% mortgage, an investment needs a pre-tax return of about 8.8% for someone on a 32% marginal rate including Medicare levy, or about 11.3% for someone on 47%. The formula is the loan rate divided by one minus the marginal tax rate.
Why isn't the mortgage rate the number to beat?
Because repaying a mortgage doesn't generate income. It removes an expense.
When $10,000 goes into a mortgage at 6%, the household avoids $600 of interest over the following year. That $600 isn't income, so it isn't taxed, and it isn't reported anywhere. The household simply keeps it.
When the same $10,000 earns 6% in a taxable investment, it generates $600 of assessable income. For someone on a 30% marginal rate plus the 2% Medicare levy, $192 goes to tax and $408 remains. The two options look identical on the surface and differ by nearly a third underneath.
This only holds where the mortgage interest is not deductible, which is the case for a standard owner-occupied home loan. Where interest is deductible, the comparison changes and needs to be worked through separately.
The mortgage hurdle rate, and how to calculate it
The break-even figure has a simple formula. Call it the mortgage hurdle rate.
Hurdle rate = loan interest rate ÷ (1 − marginal tax rate)
Using 2026–27 marginal rates, including the 2% Medicare levy, against a 6% owner-occupied mortgage:
- Taxable income of $85,000 — marginal rate 32% — hurdle rate about 8.8%.
- Taxable income of $150,000 — marginal rate 39% — hurdle rate about 9.8%.
- Taxable income of $220,000 — marginal rate 47% — hurdle rate about 11.3%.
The pattern is worth sitting with. The higher the income, the higher the bar an investment has to clear, because the tax office takes a larger share of whatever the investment produces while the mortgage saving stays untouched.
Two features of the mortgage side make the comparison sharper still. The return is certain — the interest saved is arithmetic, not a projection. And it carries no volatility, no sequencing risk and no chance of a negative year.
What the hurdle rate is not
This is a threshold, not a forecast, and the distinction matters.
An 11.3% hurdle rate does not say an investment will return 11.3%, or that any particular investment could. It says that below that figure, on an after-tax basis and before accounting for risk, the mortgage is doing more work for that household than the investment is. What a given investment actually returns is unknown in advance and can be negative.
Nor does the hurdle rate settle the decision. It's one input among several, and the others usually decide it.
What the formula leaves out
Four things move the answer, sometimes substantially.
Capital gains tax treatment. Investment returns that come as capital growth rather than income aren't taxed until the asset is sold, and a discount can apply to assets held longer than twelve months. That lowers the effective tax rate on the investment side and therefore lowers the hurdle.
Liquidity. Money paid into a mortgage is difficult to get back unless the loan has redraw or an offset account. Money in an investment can usually be reached, though possibly at a bad time and a bad price.
Where the money would otherwise sit. An offset account attached to the mortgage produces the same after-tax effect as repaying the loan, while keeping the money accessible. For many households that changes the question from "invest or repay" to "invest or offset".
The super option. Money directed into super sits in a different tax environment again and doesn't fit this formula at all — concessional contributions are taxed at 15% inside the fund rather than at the member's marginal rate, but the money is preserved until a condition of release is met.
How does super change the comparison?
Super is a third destination rather than a variant of the second, and it comes with its own rules.
Concessional contributions — employer super guarantee, salary sacrifice and personal contributions for which a deduction is claimed — all count towards one combined cap, which is $32,500 for 2026–27. It is a single limit shared across all three, not three separate allowances, though members eligible for carry-forward may have a higher effective cap in a given year.
Two disclosures belong with any discussion of super's tax efficiency. Where combined income and concessional contributions exceed $250,000 in a financial year, an additional 15% tax applies to concessional contributions above that threshold, bringing the total to 30% rather than 15%. This is Division 293, and income for the threshold includes taxable income, reportable fringe benefits, net investment losses and the concessional contributions themselves. At 30% those contributions remain concessional for anyone on the top marginal rate.
And where a deduction is going to be claimed for a personal contribution, a valid notice of intent must reach the fund before the earlier of the day the tax return for that year is lodged, or the end of the following financial year — with the fund acknowledging it before the deduction can be claimed.
The trade-off is access. A 38-year-old weighing a mortgage against super is comparing a benefit available now against one locked away for at least 22 years.
How would you actually use this?
The calculation takes about two minutes and gives a household a number rather than a feeling.
- Find the current mortgage rate and confirm whether the interest is deductible.
- Find the marginal tax rate, including the 2% Medicare levy.
- Divide the loan rate by one minus that marginal rate. That's the hurdle.
- Compare it against what's realistically on offer, then weigh liquidity, time horizon and how much variability the household can tolerate.
A common consideration is that the answer isn't binary. Some people choose to split a surplus across more than one destination, and some Australians find that the certainty of the mortgage side matters more to them than the arithmetic does.
Frequently asked questions
How do you calculate the break-even investment return against a mortgage?
Divide the mortgage interest rate by one minus your marginal tax rate, expressed as a decimal. A 6% mortgage and a 39% marginal rate gives 6 ÷ 0.61, or about 9.8%.
Does this apply to an investment property loan?
No. The formula assumes the mortgage interest is not deductible, which is the case for owner-occupied home loans. Where interest is deductible the comparison works differently and is worth checking with a registered tax agent.
Is an offset account the same as paying down the loan?
In interest terms, close to it — money in an offset reduces the balance interest is charged on, producing the same effect, while remaining accessible. The difference is flexibility rather than arithmetic.
What are the marginal tax rates for 2026–27?
Nil to $18,200, then 15% to $45,000, 30% to $135,000, 37% to $190,000 and 45% above that, plus a 2% Medicare levy for most residents. The second bracket dropped from 16% to 15% on 1 July 2026, as legislated by the Treasury Laws Amendment (More Cost of Living Relief) Act 2025.
Does capital gains tax change the hurdle rate?
It can. Returns taken as capital growth are taxed on sale rather than annually, and a discount may apply to assets held more than twelve months, which lowers the effective tax rate on the investment side and therefore the hurdle.
The useful thing about the hurdle rate is that it turns a vague comparison into a specific number a household can test against. Otivo provides regulated digital financial advice under AFSL and Australian Credit Licence No. 485665, covering debt repayment, super contributions and investing outside super, and its debt advice looks at repayment options against household income and expenses. Working out what surplus exists in the first place is usually the step before any of this, and the budget planner handles that in a few minutes.
Sources
- Australian Taxation Office, Individual income tax rates, 2026–27
- Treasury Laws Amendment (More Cost of Living Relief) Act 2025
- Australian Taxation Office, Capital gains tax
- Australian Taxation Office, Concessional contributions cap, 2026–27
- Australian Taxation Office, Division 293 tax
- ASIC MoneySmart, Borrowing to invest
- Hurdle rate figures calculated as loan rate ÷ (1 − marginal tax rate including 2% Medicare levy), against a 6% owner-occupied mortgage
Disclaimer
The information in this communication is current as at August 2026 and has been prepared by Otivo Pty Ltd ABN 47 602 457 732, AFSL and Australian Credit Licence No. 485665. This content is general information only and has been prepared without taking into account your objectives, financial situation or needs. It is not personal financial or taxation advice and should not be relied on as such. Before acting on any information, you should consider its appropriateness having regard to your personal circumstances. This material must not be reproduced in whole or in part, or posted on any social media platform, without the prior written consent of Otivo Pty Ltd.